In 2010 I openly challenged Gerald Celente’s call for the “Crash of 2010.” When I revisited this crash non-event at the end of 2010, I predicted that 2011 would be a good year for stocks. It was as U.S. stocks out-shined the world as being one of the only markets higher that year with the DOW moving 5.5% higher as international stocks lost 14%. But that wasn’t the most important issue I wrote about in that December 2010 article. I also predicted “QE infinity” by the Federal Reserve.
The Real Reason For A Crash
Celente will eventually get his crash, but I don’t think it will occur until people wake up to the problems our biggest banks are having. This is the story I first wrote about on this site (see articles below) and in my book, “Buy Gold and Silver Safely.”
It is the untold story of 2010 and beyond and something that I will keep a close eye on, since you won’t hear the media address it. It’s also one of the main reasons to own gold and silver in your portfolio. Everything is tied to the banking system.
The only thing that can interfere with this, and will, is Fed intervention. Either way, long term, gold and silver will come out on top. The more the Fed intervenes with QE1, QE2 and QE infinity, the higher the price of gold and silver will go.
If the madness of crowds ever turns against the banks, the rush to gold and silver will be like a game of musical chairs with 1,000 people clamoring for one chair.
With the addition of QE, we have seen the nations top banks balance sheets get stronger and the financial sector overall improve. But if everything is so rosy with the banks, then why the hell did Bernanke just give us QE infinity?
We Have Officially Entered QE Infinity
Federal Reserve Chairman Ben Bernanke, during the Fed meeting last Thursday, despite already talking up QE3 resulting in higher stock and gold prices, went one step further than I ever thought he would by basically opening up any type of action the Fed wishes to do “until such improvement is achieved.” Here’s exactly what he said;
The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.
To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. (Emphasis added)
Is this a Twilight Zone episode or what?
Flashback to Fed Action 1927
But it’s not the Twilight Zone. The Fed did something similar in 1927.
In 1926 – 1927, in the latter part of the “roaring 20’s,” there was a mild contraction in the economy. So what did the Fed do? The Fed “created more paper reserves in the hope of forestalling any possible bank reserve shortage. …it nearly destroyed the economies of the world in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market–triggering a fantastic speculative boom…. As a result, the American economy collapsed.” Greespan, pp.99-100
We all know what happened in 1929 with the stock market crash and subsequent Great Depression. Are we headed towards the same stock market crash? See: Stock Market Bubble and QE3 Surprise. The “madness of crowds” is continuing, but it won’t last.
Nobel Prize winning economist Paul Krugman, since 2009 has been asking the Fed to pump more money, and more money they have pumped. This is what Krugman had to say in a NY Times Op-Ed he wrote called Bernanke’s Unfinished Mission;
So if we’re going to have any real good news, someone has to take responsibility for creating a lot of additional jobs. And at this point, that someone almost has to be the Federal Reserve. If we don’t get unemployment down soon, we’ll be paying the price for a generation.
So it’s time for the Fed to lose that complacency, shrug off that fatalism and start lending a hand to job creation.
What we really need for this Twilight Zone episode is a war! Oh wait…..Krugman already asked for that in June of 2011! See; Does Paul Krugman Think War Is Needed To Help Economy Recover? You can listen to Krugman’s words saying war would be good for the economy here:
But outside of Krugman’s lust for war, why did Bernanke and the Fed come out with such language that allegedly is directed towards improving the unemployment rate? Krugman has been calling for this for 3 years, so is the Fed finally listening to him, or is the banking system still the real reason why the Fed needs to act, in righting this sinking ship? Lets look at where we are with the sub-investment grade derivatives I have been tracking and see what the data tells us.
Banking Crisis Averted or Banking Crisis Delayed?
It should first be noted that despite the recent rebound in real estate and better performance by the banks, they are still not marking to market their assets. Marking to market simply means holding on your financial statements that the public sees, the true (today’s) market value of that asset. Banks, unlike the rest of us, are allowed to hold that asset at a higher 2006/2007 price because the Financial Accounting Standards Board (FASB) whose mission is “to establish and improve standards of financial accounting and reporting that foster financial reporting by nongovernmental entities that provides decision-useful information to investors and other users of financial reports“, doesn’t follow it’s own mission statement. They allow banks to cheat.The FASB “Facts About” section goes on to say relating to the work they do; Such standards are important to the efficient functioning of the economy because decisions about the allocation of resources rely heavily on credible, concise, and understandable financial information.
Is it any coincidence that the “independent FASB” has as it’s Chairman, Leslie F. Seidman, a former J.P. Morgan exec who was responsible for “establishing policies for new financial products, particularly securities and derivatives.” From here bio;
Ms. Seidman was a vice president in the accounting policies department of J.P. Morgan & Co. Inc., where she was responsible for establishing accounting policies for new financial products, particularly securities and derivatives, and analyzing and implementing new accounting standards.
J.P. Morgan is the leading sub-investment grade derivatives bank I have been writing about for the past few years. They are also the bank that recently had a trade go the wrong way costing them $5.8 billion. Of course when the news first came out it was only a couple billion.
Which leads us to an update on the sub-investment grade derivatives the nations top banks hold. Was the recent J.P. Morgan bad trade just the beginning?
I pointed out in an article in December of 2010 that the $4 Trillion Bank Sub-Investment Grade Derivatives Now More Than Financial Crisis Peak. It still is. But what’s occurring that no one in the media or even the various popular financial media sites are talking about is how the sub-investment grade derivatives moving from the 5 year plus and 1-5 year categories to the less than 1 year category at an alarming rate as seen in the graph below.
The table below is the most recent update of sub-investment derivatives provided by the Controller of the Currency.
Click table for better view – source for chart found at http://www.occ.gov/topics/capital-markets/financial-markets/trading/derivatives/dq112.pdf
Many other financial sites talk about the massive amount of derivatives that are in the financial system today. Most of these are of the interest rate swap type and are used in normal day to day operations. In fact, the number of commercial banks and savings associations holding derivatives increased by 213 (of which 192 were savings associations) in the quarter to 1,291 according to the QCC’s quarterly report.
But my concern, and I seem to be alone on this, but the recent J.P. Morgan loss should be a glaring warning to everyone, are these growing number of sub-investment grade derivatives. MF Global was just brought down because of a bad bet by its CEO Jon Corzine.
How many more of these bad bets are lurking under the surface, waiting to be discovered? I put the odds at 100% they are there, and the Fed already knows this.
J.P. Morgan’s sub-investment grade derivatives maturing in one year or less increased $86 billion from September, 2011 to March 31, 2012. Citibank’s increased $124 billion. Bank of America’s $26 billion.
That’s why the Fed hit the panic button and is doing what they do best, try and stimulate bail out the banks.
Read again what the Fed said; “If the outlook for the labor market does not improve substantially, the committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases and employ its other policy tools as appropriate.” They may say it’s all about the labor market, but they still haven’t resolved our nations banking crisis. They know full well what’s coming down the pipeline with these derivatives and no other counterparty but them.
Federal Reserve’s Last Stand
Part of the Fed’s reasoning for doing QE1, QE2, QE3 and Operation Twists is to bring down interest rates and hope the economy responds to it. But the Fed can’t force the consumer to spend. He can’t force Baby Boomers to buy another house when they have kids in college and their own mortgage to pay or or approaching or in retirement and just are looking to conserve their wealth. Sorry, it ain’t gonna happen.
Sure, there can be some temporary benefits, like a higher stock market or a bounce in real estate prices, but not enough to get the banks to mark to market their assets, that’s for sure.
It all fits together nicely doesn’t it? You have banks that were allowed to get into the derivatives business during the Clinton administration thanks to Dodd, Schumer and others. The banks screwed up and George W. Bush gave them bailout money via TARP. Barney Frank, who told us to leave Fannie and Freddie alone, along with the previously mentioned Dodd gave us the Financial Stability Act of 2010 that didn’t do anything about these sub-investment grade derivatives. You get the FASB run by a J.P. Morgan person to allow banks to cheat. You put a President like Obama in charge, who doesn’t have a clue as to what’s going on, especially in his attempt to secure four more years (which he’ll get because Republicans love war too much).
And finally you have a Federal Reserve that is applying the only medicine it (Bernanke) thinks will work in trying to get the economy that it brought to its knees back on its feet again (which we know didn’t work in 1927 or under Greenspan). The Fed thinks that by buying mortgages it will get the real estate market going again, driving demand that will all of a sudden get the economy going again (all those businesses that were booming during the credit expansion years before the crash). If it works, then all these businesses will hire more people and the unemployment rate will drop. But the sad truth is that even with QE1,2,3 and Operation Twist, the unemployment rate is still above 8%. What the Fed is doing isn’t working, but they are putting a nice ribbon around the gift your children and grand children are going to receive in the future.
Just like in Europe, where certain countries are struggling to cope and have their hand out for more, the U.S. economy will struggle too. The Fed can keep handing out money to infinity, but at some point all credibility is lost and the system collapses. The dollar dies. Will one of the nations top banks like J.P. Morgan or Citibank be the cause of it? Probably. What will the Fed do then? Who will trust them? How much more of your tax dollars are you going to let them squander? What will you tell Congress this time? You know they’re going to walk all over you to help the banks just like they did with TARP.
Look at the gold price if you want to know the truth. Both gold and silver have shot up because of this Federal Reserve madness. Since we know the Fed and Congress will do anything to save the banks, how will you save your own wealth? Gold and silver are about the only thing you can trust right now and are the best asset for one’s portfolio. It’s the only asset the Fed hates seeing its price move higher. This, of course, even though all Central Banks own gold. The enemy of the Fed is your friend. You can bank on it!
Doug Eberhardt is a 28 year financial services veteran and precious metals broker selling gold and silver at 1% over wholesale cost. Doug has written a book to help investors understand how gold and silver fit into a diversified portfolio, how to buy gold and silver, and what metals to buy. The book; “Buy Gold and Silver Safely” is available by clicking here Contact phone number for Buy Gold and Silver Safely is 888-604-6534
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