What the heck is going on these days with the banks? More and more issues are arising with our nations banks causing concern for the investing public.
On August 17, 2009 I wrote an article entitled The Banking Crisis is Far From Over. I wanted to make people aware of what was really going on in the banking industry as it is this sector of the economy that keeps the Federal Reserve illusion of stability alive. If the Peo[le lost faith in the banking system, we would sink into a depression. From the article;
“Failed banks are weighing on FDIC” is the headline in tomorrow’s Wall Street Journal. Banks are being taken over at an alarming rate thus far in 2009. Banks aren’t lending so it is difficult for them to make a profit while at the same time they are trying to resolve their past lending decisions. Individuals are finding it difficult to secure loans with the more stringent FICO requirements. Increasing unemployment is making it difficult for many more to maintain their home ownership. As people who are now or soon to owe more than their house is worth decide to bail on home ownership, the bank will be left holding an unwanted, depreciating asset. This is occurring all at a time when banks may be forced to mark to market their assets, showing their real estate holdings value based on today’s depressed prices thus revealing balance sheets that are becoming ever more weaker.”
On February 26, 2010 I revisited the banking crisis issue in The Banking Crisis Is Far From Over Revisited – FDIC Troubles and Bank Shenanigans. In this article I pointed out the solvency issues of the FDIC itself and questioned whether raising the insurance limit from $100,000 to $250,000 really meant anything at all when the debt ridden FDIC ship was sinking. I questioned at that time why aren’t banks foreclosing on people who aren’t paying their mortgages?
“Is their an additional stimulus that can help the banks “toxic” assets? Do banks deserve being bailed out? How long can this government continue the charade that “all is well?”
All is not well….and this banking crisis is far from over, especially with the FDIC losing a grip on things. But hey…maybe they’ll raise that FDIC coverage to $1 Million and we can go about life feeling more secure! Business as usual! Sure….and maybe the Cubs will win the World Series this year…
Unlike us always faithful Cubs fans, maybe Americans better wake up and plan for the troubles ahead and not put so much faith in the banking system or the FDIC.”
By the way…2010 and 2011 were not good for the Cubs, or the FDIC as the failed bank list keeps growing. Some things never change.
On July 21, 2010, I wrote an article European Bank Stress Test Results Prediction where I assumed the forthcoming stress test would be a non-event. It was.
7 0ut of 91 European banks were found to be short of the required 6% Tier 1 capital needed, or as Steve Liesman puts it, “we’ve made a mountain out of a mole hill.”
Leave it to the pro-Fed Steve Liesman to put things into proper perspective for the CNBC listening public. He was wrong.
The data at that time (July 21, 2010) showed the following;
S&P 500 1094.86
Here is an update on that data (updated mid-day September 6, 2011);
S&P 500 1,148.17
It seems gold and silver have outperformed all stock indexes by a wide margin, yet CNBC has mocked gold all the way up in price as you’ll see in a forthcoming video I have compiled that will be available at the Buy Gold and Silver Safely website later this week.
European Banks Still In Trouble
As many of you may or may not know, the European banks are in trouble because of loans to countries such as Greece, Ireland, Portugal, Spain and Italy, whose countries are facing major financial crises. This has led to today Reuters just announcing EU officials to discuss state aid for banks.
“The discussion about boosting banks’ balance sheets follows renewed calls to do so by International Monetary Fund chief Christine Lagarde, and signals growing momentum towards tackling financial system weakness amid heightened market nervousness.”
This was the problem with those who did the Stress Test to begin with…they didn’t look at the balance sheets closely enough. I did, and the result of my analysis was the following statement;
The July 23rd European Bank Stress Test Results Will Be One Big Con
I don’t expect any real bad news to come from the July 23 (2010) Bank Stress-Results. They’ll just reveal how the capitalization ratios have been increased to where banks can sustain any further sovereign debt crisis should it come.
But the data tells me things are much worse than anything they may say.
Today’s news from The Telegraph; European banks face collapse under debts, warns Deutsche Bank chief Josef Ackermann.
Mr Ackermann said market conditions were as febrile as the height of the banking crisis. “We should resign ourselves to the fact that the ‘new normality’ is characterised by volatility and uncertainty,” he said. “All this reminds one of the autumn of 2008.”
Warning Bells Sounded, But Who Is Listening?
In September of 2010, I wrote in my book Buy Gold and Silver Safely, an entire Chapter (4) dedicated to how things will unfold with the banks and the economy in general. I said there would be a rush to Treasuries and Gold, both of which have outperformed any other asset class since that time. The 10 year treasury is at a 60 year low (meaning they have gained in value) and gold is continually hitting new records (although remember, pullbacks always come). While I wouldn’t be a buyer of treasuries any longer, I would be a buyer of gold and dollar cost averaging into a position is the recommended strategy.
I also said there would be major banking problems. From Chapter 4;
Banks are not slowing down when it comes to taking risk. The top five banks…have 34% of their credit derivatives listed as sub-investment grade. Fifty-nine percent of J.P. Morgan Chase Bank’s credit derivatives are of sub-investment quality. This represents $2 trillion, or more than the entire total assets of the company. Three trillion dollars of these sub-investment grade credit derivatives with the top five banks, representing the majority, mature in 1-5 years.
So with the 2008 financial crisis and bailout by the People via TARP, the banks got their act together right? The banks became more conservative right? Let’s see what transpired since that time…
On October 8, 2010 I wrote; The Real Reason Bank of America Halts Foreclosure In 50 States – They’re Broke! A simple analysis of their balance sheet showed this. But the fact remained that banks were actually cheating on their balance sheets, fully blessed by the Financial Accounting Standards Board (FASB) as they were allowed to mark to fantasy values the assets they have on their books.
“Banks have already received a reprieve from the Financial Accounting Standards Board (FASB) in April 2009 by not having to market to market their real estate at today’s prices, but keep them listed on their balance sheets at the higher prices they once were. No one seems to ever mention this fact do they?
Even to this very moment, the banks are fighting modification of these rules. If banks had to revert to the old rules, the system would collapse and they know it.”
Banks are still marking to fantasy their assets. Until that changes, I wouldn’t be investing in banks or real estate.
Conclusion from that article;
“Yes, gold and silver are good for hedging against that portion of your portfolio that is U.S. dollar based (U.S. stocks, U.S. corporate bonds, U.S. government bonds), but its also a hedge against a total collapse of the system, including the banking system. It is insurance that I believe everyone should have.”
I expand on this “gold as insurance” in a subsequent banking analysis article written on June 3, 2011 titled; Increase In Bank Sub-investment Grade Derivatives Reveal A Need For Gold Insurance.
Since banks can’t make money the old fashioned way, by loaning out to individuals and businesses, they had to turn to the old standby; derivatives. In 2008, as I pointed out above, the sub-investment grade derivatives the nations top banks held totaled just over $3 trillion. Today the sub-investment grade derivatives stand north of $4 trillion. So much for banking reform. But who is telling you this information? Who specifically mentions the fact that there will be no counterparty to these sub-investment grade derivatives these banks hold except the lender of last resort, the Federal Reserve? How long can the Federal Reserve keep secret what they do? It’s obvious to me they are bailing out the banks. They have to in saving the system.
It’s not that I want the system to fail either. But there has to be some responsibility to the People. Congress needs to cut programs and live within their means. But will they ever do such a thing? Not while there are lobbyists for special interest that influence their decisions. Not while there are multi-trillion dollar budget deficits. Not while there are no restraints via a Constitutional amendment. That’s why you own gold and silver. You own insurance for your car but never get in an accident. You own insurance for your home but it never is destroyed by fire or flood. What insurance do you have for your portfolio? The answer is NONE! The reason you have no gold insurance is what I wrote about in Chapter 3 of my book; Flaws Of The Financial Services Industry. It’s what they have taught us as financial advisors that is flawed. The result is you are not protected with your investments.
Yes Virginia, there will be more Quantitative Easing in the future. They may call it something else by then, but you can bank on the fact the Fed will be pulling out all stops to right the sinking U.S. ship. But at the same time, the Euro is sinking too. And the Yen has no business being as strong as it is. Japan hasn’t even dealt with their triple disaster (Earthquake, Tsunami, Nuclear) and they led the world in Debt to GDP ratio BEFORE the disaster struck.
All of these currencies are on the sinking ship called the Titanic. Investors run from one side of the ship to the other, thinking that currencies are safe investments as the Financial Services industry would have you believe (the Risk Free Asset). But they are sinking in price compared to gold and silver.
Gold has risen in price the last 10 years 599% versus the U.S. Dollar, 532.31% versus the British Pound, 346% versus the Euro, 345% versus the Yen and 343.13% versus the Canadian Dollar. The Swiss France, at 226%, the best of the bunch, today had its Central Bank announce they are now pegging their currency to the Euro. If I were a Swiss citizen, I’d be clamoring for gold NOW!
Banks Keep Getting More Bad News
And the bad news for banks in the U.S. isn’t over yet FHFA Sues 17 Firms to Recover Losses to Fannie Mae and Freddie Mac. And now the lawyers have started their attacks (lawsuits) on banks. This cannot end well. But remember, cheerleaders cheer their team on till the 4th quarter ends. Just ask Steve Leisman. More Federal Reserve Quantitative Easing is the only answer these clowns have. It doesn’t “fix” anything. But gold and silver can at least hedge your portfolio against the inevitable.
What Investors Need To Do
The only type of gold and silver you need for your portfolio is bullion coins or bars. No European coins like the gold Swiss Franc or British Sovereign or other numismatic coins like St. Gaudens will hedge your portfolio the way bullion American Eagle Gold and Silver bullion coins can with much less of a premium over spot. Prepare now for what’s to come.
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
Commodity Futures Trading Commission Futures and Options trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don’t trade with capital you can’t afford to lose. This is neither a solicitation nor an offer to Purchase/Sell futures or options. No representation is being made that any account will or is likely to achieve gains or losses similar to those discussed in this outlook. The past track record of any trading system or methodology is not necessarily indicative of future results.
All trades, patterns, charts, systems, etc. discussed in this outlook and the product materials are for illustrative purposes only and not to be construed as specific advisory recommendations. All ideas and material presented are entirely those of the author.