The Daily Reckoning
Tuesday, September 1, 2009 |
Are the undead of the banking world really stronger? Household borrowing has fallen off a cliff... How do you know when something is a genuine public service? Byron King with a look at the Empire of Consumption...and more!
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The Undead of the Banking World
by Bill Bonner
Bedford Springs, Pennsylvania
Hey, the economy is not only recovering...it's becoming better than ever before!
"Banks recover to their levels before the fall of Lehman," is a headline in this Monday's El Pais from Madrid.
"Public assistance enables the world's largest 15 financial firms to return to the capitalization they had in September 2008," the article continues. The largest of the largest, HSBC, is now judged to be worth $186 billion, according to the stock market. China's ICBC is on its heels, with a market cap of $178 billion. BNP Paribas is 7th at $87 billion.
We will overlook the compromising detail that banks actually lost money in the last quarter - more than $3 billion. And let's forget that China's major banks are sitting on mega-losses from more than eight years ago (to say nothing of the more recent losses). Western banks, too, still have billions in assets whose real worth is an open question...and subject to quick reconsideration...
El Pais goes on to report something intriguing: "The two big Spanish banks leave the crisis stronger."
Ah. What doesn't kill you makes you stronger. The world economy is recovering, or so people believe. Stocks are going up - led by the banks. But are the undead of the banking world really stronger?
Ha ha...don't make us laugh.
But the world seems to believe it. The Wall Street Journal reports that just five big financial stocks are behind the stock market's rally. Fannie Mae, Citigroup, Freddie Mac, Bank of America and AIG account for nearly a third of market's daily turnover. Seems everyone is speculating on the banks...and moving them higher.
You will recall, dear reader, the banks made a fortune during the bubble years. You may also recall that they made so much money that when the bubble years came to a close, that they were almost all broke. Without hasty action from the feds, it would have been the end of the road for every major bank on Wall Street. As it was, even with government help, none of them survived intact. They all either went bankrupt, were sold off, or got bailouts with strings attached.
What busted the banks was too much of a bad thing. They made their money by peddling debt. In order to move the stuff, they convinced clients that their products were good safe investments - even leveraged derivatives backed by subprime mortgages! Such good salesmen were they that they even convinced themselves. When the crisis came, they realized that they had been buyers of the debt...as well as sellers of it. What could they do with it...except sell it to the feds?
But the whole financial industry is coming back to life. According to El Pais, it's back...and it's better than ever.
But wait? How could that be? Hasn't the world entered the worst recession since the great depression? How could lending money be such a good business? People don't borrow in a recession.
Strategic Short Report's Dan Amoss is just as skeptical. "The banking system has no experience managing through the current 'negative home equity' environment," he tells us. "This is an environment in which mortgage rates are already about as low as they can get and consumer balance sheets are as stressed as ever. Due to the nonrecourse nature of mortgages, most borrowers have no financial incentive to keep paying. Many are choosing to mail the keys back to the lender.
"This problem will cap the upside of bank stocks for years to come, so the sector will offer lots of short selling opportunities."
[Dan predicted the fall of Lehman, months before it occurred - leading his readers to major gains. Now he has done the same with another big bank...and the opportunity to profit is still available. Get all the details here.]
Borrowing by households has fallen off a cliff. Instead of borrowing, they're paying back debt at the fastest rate since the '50s. No money to be made there.
How about commercial and business loans? Are you kidding? Businesses are cutting back too. Businesses borrow to expand...and there is no expansion going on. This is a contraction. Credit is contracting along with everything else.
Then, how could the banks make money? Let's refer to that news item again. Oh...there are the magic words: "Public assistance enables..."
The banks are making money the same way Detroit is making money...dishonestly and temporarily. Instead of doing honest deals with willing and able counterparties, the banks are pulling a fast one. Their money comes, ultimately, from the poor taxpayer...the poor sap who funds all the government's giveaways. The private sector lived far beyond its means during the bubble years. People wasted their money they didn't have on things they didn't need. Now, they try to save their money. But now the government wastes their money for them.
Speaking of which...a quick note on the Cash for Clunkers program. Numbers to be released today are expected to show a peak in sales in August caused by the feds' incentives. President Obama calls the program a showcase, proving how effective government can be at getting the economy back on the road.
But let's go back to basics. It's a sham when people waste their own money. It's a crime when they waste other peoples' money. Prosperity comes from accumulating (saving) capital...and using it to increase productive capacity. The formula is pretty simple: Save your money. Invest it in productive business. The Clunkers program encouraged people to do the opposite - consume capital, other peoples' capital.
'Nuff said.
[While we certainly don't condone handouts, we do encourage you to check out a legal 'loophole' in the bailout...one that could pay you up to $17,500 this year in income checks. Don't sit idly by while the stimulus money gets dumped into the big banks or the auto industry - get your share. Your first check could be in the mail soon...]
More news from The 5 Min. Forecast:
"Our forecast today: The government and mainstream media will soon be calling the end of the recession," writes Ian Mathias in today's issue of The 5 Min. Forecast. "Leading this feeble cause is the latest ISM manufacturing index, probably the most powerful argument for recovery we've seen yet:
"This morning, the ISM said its gauge of manufacturing activity had risen to 52.9 in August - out of contraction for the first time since the recession began and the highest score since June 2007. Of course things are a bit different now, but over the last 60 years, when the manufacturing sector returns to growth, the recession has already ended. That prospect is enhanced by the capacity utilization data we mentioned earlier this month - another recession ending indicator now glowing green.
"What's more, pending home sales rose 3.2% in July, the National Association of Realtors also reported. With an index score of 97.6, that's a 12% rise from this time last year, the highest level in two years and the sixth straight month of improving pending sales conditions.
"Factor all that in with rising consumer sentiment, home price and stock indexes, and we suspect now is around the time when the government will eventually declare the recession ended...which will make way for all kinds of shelved legislation and the political agendas that popularized the current administration in the first place.
"Then there's that whole 'double dip' dilemma...but we'll save that for another five minutes."
Ian writes every day for The 5 Min Forecast, an executive series e- letter that provides a quick and dirty analysis of daily economic and financial developments - in five minutes or less. It's a free service available only to subscribers of Agora Financial's paid publications, such as Resource Trader Alert. RTA's latest report details a trading strategy that will help you rake in some nice gains in a short period of time...without having to touch stocks. Get the full report here. And back to Bill, with more thoughts:
We were going to let Ted Kennedy go to his grave without mention here at The Daily Reckoning. The newspapers, television and radio shows have mentioned it enough. Even the foreign press has taken note of the event.
We might have let it go, but we have taken an oath: whenever we see a bubble we must pop it. And there is a bubble in Kennedy worship so big it threatens to blot out the sun. Today, we approach with a needle.
No writer has failed to mention that Mr. Kennedy was not the first of the clan die. The press cannot resist hero worship - especially when its heroes die young.
The Kennedy brothers could have lived comfortably all their lives on their father's liquor money. Instead, they took up the banner of 'public service' and wrapped themselves in it so tightly it suffocated them all. The oldest of the band was killed in WWII. Ted Kennedy's grave lies only 100 feet from his brother, Robert, killed in 1968 while running for president. And only another 100 feet from another brother who was shot down five years earlier. With that kind of curse on a family, you'd think the younger bro would have gone back into the liquor business. Instead, the younger held his head up...headed for glory...and drove off a bridge. The bridge probably saved him. Had he made it beyond the primaries, some nutcase would have certainly taken a shot at him.
The bridge incident would have sunk a lesser man - that is, one who lacked the name, family connections, lawyers, and money of Ted Kennedy. It probably would have sunk a more reflective, more sensitive man too. A man with a sharper conscience might have seen the girl's face in his dreams and have been driven to drink...eventually drowning himself in his own guilt, like a character from a Russian novel. But Kennedy had the ability to rise above shame and put scandal behind him, with some helpful amnesia from the press. Chappaquiddick is reported in today's press as though it were a personal triumph. A lesser man would have gone to jail for manslaughter; Kennedy went on to become the 'lion of the Senate.' He merely gave up his presidential aspirations and buckled down to the life of a Senate hack. The eulogies tell us that driving off the bridge, drunk, made him what he was: "the greatest legislator of all time," as the President put it.
No, we never shared the conservatives' loathing for the man. We never met him. Had we known him personally, we probably would have found him as agreeable a drinking companion as anyone else. But we come neither to bury Ted Kennedy, nor to praise him...we merely poke fun at the world that idolizes him.
The fact that the Kennedys committed themselves to 'public service' seemed to make them part of the furniture of public life. Everywhere you looked, there they were. The newspapers loved them. Everyone knew what they looked like. Hairdressers knew their private lives. Taxi drivers suffered their personal tragedies as if they were one of the family.
But the Kennedys were more than just furniture. First, because they were not particularly useful...you couldn't sit on them or dine on them. More importantly, when it came to decorating the republic, they were the ones who wanted to arrange the furniture.
All the obituaries hammered this point as if they were hardening steel: "He devote his life to public causes..." says one. "He fought for the poor and the downtrodden..." says another.
He said so himself. In a letter to Pope Benedict XVI, Kennedy seemed to write his own obituary. He allowed as how he had "done his best to champion the rights of the poor and to open doors of economic opportunity. I've worked to welcome the immigrant, fight discrimination and expand access to health care and education..."
USA Today provides a typical illustration of the Senator's magnanimity and generosity.
A woman with an autistic son asked the government for help. "The Haitian immigrant wrote to her senator, 'the only one who can understand what it takes to raise a child with disabilities.'" (Kennedy's son lost a leg and his sister, Rosemary, was mentally disabled. This, according to USA Today, gave him "a connection with the public's private pain.")
"Within three weeks," the news item continues, "they secured vocational and life skills training [for the son]...that allowed his mother to finally earn a college degree last year at age 58.
"I have my life back and my son is no longer under by my care 24 hours a day..."
No...now he's under someone else's care! Kennedy redecorated. He moved the cost of caring for the poor fellow on to someone else.
And what does the mother do with her free time? She's now a "community organizer." You can bet she's organizing more transfers...of money from the people who earned it to the people who didn't.
"He was always reaching out," said Democratic strategist Donna Brazile. Yes, he was always re-arranging the furniture. And USA Today told us that he inspired a whole race of redecorators - people infected by a desire for 'public service.'
"Hundreds of lesser-known former Kennedy staffers and campaign volunteers...followed him into public service...The alumni of his office pepper the government..."
But what is the consequence of all this meddling? Is the nation better off for it? None of the obituaries we saw even raised the question. How do you know if something is genuinely a public service? Is it a public service when you take money from one person and give it to another? The press seems to think so. Is it a public service when you load up the nation with hundreds of billions worth of programs and pet projects?
Kennedy was a prolific proposer...a serial legislator...a Tom Friedman with a Senate seat. Surely some conservative think tank has totted up the cost of all his legislation. And surely it is in the hundreds of billions of dollars. Where did the money come from? It had to come from somewhere. It has to come from people who had ideas and plans of their own...people who had put the couch under the window and the TV in front of the easy chair, just the way they wanted it. Were they really any better off when Kennedy moved things around? Was the republic stronger, healthier, more prosperous and more honest after the Kennedy brothers got through with it?
We leave you with the question.
As for Ted Kennedy, the man was a scalawag. But he was God's scalawag; and all His creatures deserve our respect. And now that he's in the dirt, God will do with him as He chooses. RIP.
Until tomorrow,
Bill Bonner
The Daily Reckoning
P.S. Our own Addison Wiggin was on FoxBusiness.com LIVE yesterday talking about the increase in deficits (up to $9 trillion) that have been projected by the Congressional Budget Office. This is "par for the course with what's happening in Washington right now," said Addison.
You can see the whole interview online. Addison begins at the 16:35 mark. Get it here.
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| The Daily Reckoning PRESENTS: Things in the economy are still not well. And Byron King certainly doesn't buy into the "green shoots" theory of the recovering economy. There are too many bad decisions being made at the highest levels. These bad decisions will not help the economy get well. Read on...
An Empire of Consumption
by Byron W. King
Pittsburgh, Pennsylvania
Just reading the newspapers gives me a daily diet of economic gloom. For example, my pessimism for today (Aug. 26) started with the headline of my local newspaper this morning. The Pittsburgh Tribune Review delivered a banner message, "Record Red Forecast at $1.58 Trillion." (I think they printed the newspaper before the word came out that Sen. Ted Kennedy died.)
Then for a national perspective, I looked at The Wall Street Journal, which published a slightly different alliteration, "Decade of Debt: $9 Trillion." And finally, for an international view, The Financial Times summed it all up in characteristic British understatement, with, "US Says Debt Outlook Worsening." Oh, you don't say.
The big problem - obviously, the headline issue - with the US economy is too much debt. (That's the BIG problem. There's a long list of other problems after that.) And the debt problem is getting worse, not better.
Debt is ubiquitous across US society. Debt permeates the culture. Practically the whole nation has bitten off more than it can chew. Within the past two generations, the US economy has transformed from what Harvard historian Charles Maier calls an "empire of production" (which is what won the Second World War, for example) to an "empire of consumption."
The lunch bucket-toting factory worker, or the beam-walking riveter constructing a skyscraper, symbolized the former empire of production. Those iconic workers are no more. They've been replaced by the image of vast tracts of McHouses blanketing the landscape. Or of parking lots filled with new cars outside coast-to-coast malls, with their owners inside maxing out their credit cards.
It's the difference between an economy that creates surplus capital and an economy that consumes capital to gross deficit. Professor Andrew Bacevich of Boston University summed it up this way in his recent book, The Limits of Power. "The evil genius of the empire of production was Henry Ford. In the empire of consumption, Ford's counterpart was Walt Disney."
Come to think of it, we should be so fortunate as to be indebted just because we collectively took too many trips to Disneyland. As a nation, the US has borrowed and spent far beyond its means. You know what I mean. I don't have to get into the details on that point. In particular, the political class just can't seem to say no.
| "Now people with white collars are getting hit with permanent job losses in sectors like banking and law. Many parts of the nation's financial districts are the new Rust Belts of America." | |
The other side of that debt coin is a widespread inability to repay. Households are so deep in debt that they've stopped buying, and I don't care what the so-called consumer confidence surveys say. Less buying means that business profits are down. Where businesses are showing profits, a lot of it is because they are goosing the bottom lines through layoffs and spending cuts.
Layoffs? That's putting it mildly. Many of the recent job losses are permanent. They're structural. It's not just the good old days, when the company said, "Go home and we'll call you back in a few months." No, in many cases, the jobs are gone forever.
It's not just factory jobs, either. Those jobs were the first to go. The US economy lost millions of its old-line factory jobs over the past 25 years or so. It brought us into the age of the Rust Belt. Some economists and deep thinkers bragged about how this was somehow "good" for America. (Call me old-fashioned, but I could never quite figure that out.)
Now people with white collars are getting hit with permanent job losses in sectors like banking and law. Many parts of the nation's financial districts are the new Rust Belts of America.
There are former lawyers waiting on tables, stealing jobs from the traditional class of table servers, starving artists. At many silk- stocking firms, even the formerly sacrosanct legal "billable hour" is under attack. And I know doctors and architects who've been laid off.
So joblessness is up, and it's not about to come down anytime soon. With joblessness up, tax collections are down across the board. Unemployment compensation accounts are running out of money. Public assistance accounts are running down. Some states want to give early release to prisoners to save the costs of incarceration.
In Michigan, for example, some counties are no longer repaving the roads. They just grind the asphalt to gravel and save the cost of paving. It's a foretaste of things to come, I believe.
I don't see where the problems of indebtedness have been cured. We're not even close. Maybe it's my inner bankruptcy attorney at work. Where's the wipeout? Where's the discharge? How has all that bad paper out there been voided? It hasn't.
Regards,
Byron W. King
for The Daily Reckoning
P.S. So this brings me back to why I like precious metals and energy. It's the Real McCoy. It's nobody else's liability. If there's anything like safety in this economy, I believe that it's in precious metals and energy.
Precious metals and energy make up a well-balanced portfolio. If you haven't gotten your share yet, there's still time...get yours now.
Editor's Note: Prior to joining the team at Agora Financial, Byron received his Juris Doctor from the University of Pittsburgh School of Law, was a cum laude graduate of Harvard University, served on the staff of the Chief of Naval Operations and as a field historian with the Navy. Our resident energy and oil expert, Byron is the editor of Outstanding Investments and Energy and Scarcity Investor.
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