March 6, 2012
By Ron Paul
“Ron Paul, as always, speaks the truth. No one running for office knows more about the corruption of the federal reserve than Paul. Here is an article he wrote to explain why we should be weary of this institution.” –KTRN
While the Fed has recently released an unprecedented amount of information on its activities, there is still much that remains unknown. Predictably, every push towards transparency has been fought tooth and nail. It took disclosure requirements enacted within the Dodd-Frank Act to get the Fed to provide data on its emergency lending facilities. It took lawsuits filed by Bloomberg and Fox News to provide data on discount window lending during the worst parts of the financial crisis. And it will take further concerted action on the part of Congress, the media, and the public to keep up pressure on the Fed to become and remain transparent.
Transparency is not a panacea, however, as a fully transparent organization is still capable of engaging in all sorts of mischief. Ironically, one of the Fed’s more egregious recent actions, adopting an explicit inflation target, was hailed by many as another wonderful example of transparency. Yet if you think about what this 2% inflation target actually is, you realize that it is an explicit policy to devalue the dollar and reduce its purchasing power. And it adds up quickly over time. Two percent annual price inflation means that prices rise 22% within a decade, and nearly 50% within two decades.
It is worse than that, however. This explicit 2% target also fails to take into account that whatever measure is used to determine price inflation, be it CPI, core CPI, PCE, etc., will always be chosen with an eye towards underreporting the true rate of inflation and price rises. Pressure will be exerted on those calculating the price indices, so as not to alarm the public when prices begin to accelerate.
Of course, government officials claim that price increases do not affect the average American because they can always substitute hamburger for steak, or have cereal instead of bacon to protect their family budget as prices rise. But the American people don’t overlook the fact that their quality of life has suffered because of the Federal Reserve and price inflation. What will they substitute when hamburger and cereal go sky high?
February 7, 2012
The Economic Collapse
The people out there that believe that the U.S. economy is experiencing a permanent recovery and that very bright days are ahead for us should have their heads examined. Unfortunately, what we are going through right now is simply just a period of “hopetimism” between two financial crashes. Things may seem relatively stable right now, but it won’t last long. The truth is that the financial crisis of 2008 was just a warm up act for the economic horror show that is coming. Nothing really got fixed after the crash of 2008. We are living in the biggest debt bubble in the history of the world, and it has gotten even bigger since then. The “too big to fail” banks are larger now than they have ever been. Americans continue to run up credit card balances like there is no tomorrow. Tens of thousands of manufacturing facilities and millions of jobs continue to leave the country. We continue to consume far more than we produce and we continue to become poorer as a nation. None of the problems that caused the crisis of 2008 have been solved and we are even weaker financially than we were back then. So why in the world are so many people so optimistic about the economy right now?
Just take a look at the chart posted below. It shows the growth of total debt in the United States. During the financial crisis of 2008 there was a little “hiccup”, but the truth is that not much deleveraging really took place at all. And since the recession “ended”, total credit market debt has gone on to even greater heights….
So what does this mean for the future?
Well, if a small “hiccup” in the debt bubble caused so much chaos back in 2008, what is going to happen when this debt bubble finally bursts?
That is something to think about.
Sadly, most Americans seem oblivious to all of this.
If you go out to malls in the wealthy areas of America today, people are charging up a storm. In all, Americans charged a whopping 2.5 trillion dollars on their credit cards during 2011. Way too many people have already forgotten the lessons that we all learned back in 2008.
October 17, 2011
By Felix Salmon
When the financial crisis hit, the smart money went to cash. Literally, in the case of Mohamed El-Erian:
On the Wednesday and Thursday after Lehman filed for Chapter 11, I asked my wife to please go to the ATM and take as much cash as she could. When she asked why, I said it was because I didn’t know whether there was a chance that banks might not open. I remember my wife sort of pausing and saying, “Are you serious?” And I said, “Yes, I am.”
It turns out that this was a worldwide phenomenon. Here’s Ravi Menon, the managing director of the Monetary Authority of Singapore, in a speech last week (HT IK):
Physical cash commands a premium during times of uncertainty. We saw this during the 2008 global financial crisis. Within the first month of the collapse of Lehman Brothers, there was an exceptionally large withdrawal of high denomination notes by banks in Singapore. Typically, 90 per cent or more of the high-denomination notes withdrawn from banks are re- deposited within the month. During the initial months of the 2008 crisis, only 70 per cent of the $100, $1,000 and $10,000 notes withdrawn were returned.
This is understandable. But the fact is that cash is a very expensive payments mechanism:
Handling cash is costly. According to a 2010 study by Retail Banking Research, the cost of distributing, managing, handling, processing and recycling cash in Europe is estimated at €84 billion. This is equal to 0.6 per cent of Europe’s GDP.
For individuals, cash clears at par: if you give me a $100 bill, then I’m $100 richer and you’re $100 poorer. No one’s going to jump in and charge a fee for facilitating the transaction. And if I then deposit the $100 bill into my checking account, once again I see the full amount appear on my statement.
But the fact that most people never get charged for cash transactions is corrosive, in its own way: it helps to impede the inevitable-yet-glacial move away from cash and towards more secure, easier, and cheaper forms of payments.
Which is one reason why Bank of America’s $5 charge for debit transactions is so mindblowingly stupid. The more that people use their debit cards, the less they’ll use cash. And Bank of America spends billions of dollars every year processing heavy, dirty cash flowing in and out of its branches. If banks can persuade people to move to weightless forms of payment like debit, it will save them enormous amounts of money. After all, most of that 0.6%-of-GDP cost of processing cash is borne by retail banks.
And much of the rest is borne by the government. Minting physical currency is expensive! And wasteful! (Menon reveals, in his speech, that those charity-donation buckets in airports are placed there largely at the behest of the monetary authority, to try to stop local coins from leaving the country and having to be re-minted.)
Which means there’s a massive public-interest argument in favor of slowly phasing out cash in favor of other kind of payments. That’s never going to be easy, but it’s going to be pretty much impossible if the alternative payment mechanisms don’t clear at par.
I don’t know what kind of payment mechanism the world will ultimately alight on; I suspect however that it will use NFC technology in cellphones, and that it will be owned and run by a consortium of large retail banks. In the meantime, however, it behooves everybody, from the government to the banks, to do everything they can to wean people slowly off cash. If cash transactions cost the US 0.5% of GDP each year, that’s $70 billion a year at stake — significantly more than all credit and debit interchange fees combined. Don’t any of our greedy banks see the opportunity here?
October 7, 2011
By: James Kirkup
The world is facing the worst financial crisis since at least the 1930s “if not ever”, the Governor of the Bank of England said last night.
Sir Mervyn King was speaking after the decision by the Bank’s Monetary Policy Committee to put £75billion of newly created money into the economy in a desperate effort to stave off a new credit crisis and a UK recession.
Economists said the Bank’s decision to resume its quantitative easing [QE], or asset purchase programme, showed it was increasingly fearful for the economy, and predicted more such moves ahead.
Sir Mervyn said the Bank had been driven by growing signs of a global economic disaster.
“This is the most serious financial crisis we’ve seen, at least since the 1930s, if not ever. We’re having to deal with very unusual circumstances, but to act calmly to this and to do the right thing.”
Announcing its decision, the Bank said that the eurozone debt crisis was creating “severe strains in bank funding markets and financial markets”.
The Monetary Policy Committee [MPC] also said that the inflation-driven “squeeze on households’ real incomes” and the Government’s programme of spending cuts will “continue to weigh on domestic spending” for some time to come.
The “deterioration in the outlook” meant more QE was justified, the Bank said.
Financial experts said the committee’s actions would be a “Titanic” disaster for pensioners, savers and workers approaching retirement. Sir Mervyn suggested that was a price worth paying to save the economy from recession.
Under QE, the Bank electronically creates new money which it then uses to buy assets such as government bonds, or gilts, from banks. In theory, the banks then use the cash they gain to increase their lending to businesses and individuals.
By increasing the demand for gilts, QE pushes down the interest rate yields paid to holders of these and other bonds. Critics of the policy say it pushes up inflation and drives down sterling.
The National Association of Pension Funds yesterday called for urgent talks with ministers to address the negative impact of lower gilt yields on pension funds. Joanne Segars, its chief executive, said QE makes it more expensive for employers to provide pensions and will weaken the funding of schemes as their deficits increase. “All this will put additional pressure on employers at a time when they are facing a bleak economic situation,” she said.
Ros Altman, of Saga, said the latest round of QE was “a Titanic disaster” that would increase pensioner poverty. As well as fuelling inflation, she said, falling bond yields would make annuities more expensive, “giving new retirees much less pension income for their money and leaving them permanently poorer in retirement”.
The MPC also voted to keep the Bank Rate at its historic low of 0.5 per cent, another decision that hurts savers. Yesterday, protesters outside the Bank’s headquarters smashed a giant piggy bank to symbolise the situation of pensioners and others forced to raid savings to keep up with the rising cost of living.
Asked about the plight of savers, Sir Mervyn said it was more important to support the wider economy than to support them. He suggested that savers would not be helped by deliberately pushing the British economy into recession. Yesterday’s decision was the first move on QE since 2009, during the global credit crisis, when the Bank injected £200 billion into the economy.
Some analysts believe that this round of QE could be less effective than the previous one, forcing the Bank to create even more money this time.
Michael Saunders of Citigroup, forecast that there could be as much as £225 billion more QE by next year. “I think they will do lots more QE,” he said. “It’s both that the economy is weak but also that the MPC’s view is that QE is not a very powerful tool, or rather it takes a large amount of QE to have much effect on the economy.”
The Bank is supposed to keep inflation near a target of 2 per cent. Inflation now stands at 4.5 per cent, and the Bank admitted it is likely to hit 5 per cent as soon as this month. The Bank’s own research shows that as well as stimulating the economy, QE pushes up prices.
Sir Mervyn insisted that yesterday’s move was still consistent with the 2 per cent inflation target, saying that the slowing economy means inflation could actually fall below that mark “by the end of next year or in 2013”.
The Governor insisted that the MPC’s decisions had been the correct response to events. “The world economy has slowed, America has slowed, China has slowed, and of course particularly the European economy has slowed,” he said. “The world has changed and so has the right policy response.”
City traders took heart from the Bank’s move to boost growth, with the FTSE 100 rising 3.7 per cent to 5,29, its biggest two-day gain since 2008.
The Bank’s decision came after mounting political pressure from ministers worried that Sir Mervyn was not reacting urgently enough to the darkening global economic outlook.
George Osborne, the Chancellor, welcomed the Bank’s move, saying: “The evidence shows that it [QE] will help keep interest rates down and boost demand and that will be a help for British families.”
August 11th, 2011
The Economic Collapse
How far does the stock market have to go down before we officially call it a crash? The Dow is now down more than 2,000 points in just the last 14 trading days. So can we now call this “The Stock Market Crash of 2011″? Today the Dow was down 519 points. Yesterday, an announcement by the Federal Reserve indicating that the Fed would keep interest rates near zero until mid-2013 helped the Dow surge more than 400 points, but all of those gains were wiped out today. It turns out that the Federal Reserve was only able to stabilize the financial markets for a single day. Fears about the European sovereign debt crisis and the crumbling U.S. economy continue to dominate the marketplace. With each passing day, things are looking more and more like 2008 all over again. So what is going to happen if “The Stock Market Crash of 2011″ pushes the U.S. economy into “The Recession of 2012″?
Just like in 2008, bank stocks are being hit the hardest. That was true once again today. Bank of America was down more than 10 percent, Citigroup was down more than 10 percent, Morgan Stanley was down more than 9 percent and JPMorgan Chase was down more than 5 percent.
Bank of America stock is down almost 50 percent so far this year. Overall, the S&P financial sector is down more than 23 percent in 2011 so far.
How soon will it be before we start hearing of the need for more bailouts? After all, the “too big to fail” banks are even bigger now than they were in 2008.
All of this panic is causing the price of gold to reach unprecedented heights. Today, gold was over $1800 at one point. If the current panic continues for an extended period of time, there is no telling how high the price of gold may go.
In the United States, much of the focus has been on the fact that the U.S. government has lost its AAA credit rating, but the truth is that the European sovereign debt crisis is probably the biggest cause of the instability in world financial markets right now.
The European Central Bank has decided to start purchasing Italian and Spanish debt, and there have been rumors that French debt could be hit with a downgrade. Europe is a total financial basket case right now and unless dramatic action is taken things are going to get progressively worse.
Of course the U.S. is also certainly contributing greatly to this crisis. The federal government is on track to have a budget deficit that is over a trillion dollars for the third year in a row. The U.S national debt is a horrific nightmare, but our politicians keep putting off budget cuts.
The debt ceiling deal that was just reached basically does next to nothing to cut the budget before the next election. Unless the “Super Congress” does something dramatic, the only “budget cuts” we will see before the 2012 election will be 25 billion dollars in “savings” from spending increases that will be cancelled.
The modest spending cuts scheduled to go into effect beginning in 2013 will probably never materialize. Whenever the time comes to actually significantly cut the budget, our politicians always want to put it off for another time.
But in the end, debt is always going to have its day. Our politicians can try to kick the can down the road all they want, but eventually a day of reckoning is going to come.
In fact, if the U.S. and Europe had not piled up so much debt, we would not be facing all of the problems we are dealing with now.
Things could have been so much different.
But here we are.
The truth is that this debt crisis is just beginning. There is no magic potion that is going to make all of this debt suddenly disappear.
Most Americans have no idea how much financial pain is coming. We have been living way beyond our means for decades, and now we are going to start paying for it.
Now that long-term U.S. government debt has been downgraded, huge numbers of other securities are also going to be affected. In fact, according to a recent Bloomberg article, S&P has already been very busy slashing the ratings on hordes of municipal bonds….
August 5th, 2011
By: Sheryl Nance Nash
The stock-market roller coaster has been wild enough to make even the most stoic, stiff-necked investors queasy. After falling in 10 out of the last 11 trading sessions, the stock market plunged more than 500 points Thursday, making it the worst day for the Dow since Oct. 22, 2008, the day that marked the beginning of the global financial crisis. On Thursday, the index lost 4.3% — erasing all the gains for the year — to end at 11,384.
What’s stoking the volatility? The U.S. dodged the default bullet, but not everybody is impressed. “The negotiated debt-ceiling settlement is being seen by world’s financial markets as a smoke screen,” says James DiGeorgia, publisher of the Gold and Energy Advisor newsletter. “No matter how many times my fellow Republicans repeat the mantra that Washington has a spending problem, not a revenue problem, the truth is we cannot make a dent in the national debt unless we reduce spending and raise revenues.
“Without swift tax reform lowering corporate and individual rates in exchange for eliminating the special-interest patchwork of tax breaks and subsidies, we’re going to continue to see the national debt spiral higher and the dollar weaken.”
The fact remains that the U.S. economy is not just lackluster, but flirting with recession part deux.
“Continued weakness has shown in the recent economic numbers. The [gross domestic product] at 1.3% is at a recessionary level and not nearly what is necessary to reduce the compounding effect of our deficit,” says Jeff Sica, president and chief investment officer of Sica Wealth Management. “Downward revisions on economic numbers make lagging indicators even worse, suggesting what we always believed: we never left the recession.”
Unemployment remains high, even though it fell to 9.1% in July, from 9.2% in June. And even worse, job cuts have surged 60%, which will boost unemployment much higher, Sica says.
At least the U.S. isn’t alone. “The European economy is collapsing,” Sica says.
Europe is addressing its fiscal and monetary problems way too slowly, DiGeorgia says. Greece, Italy, Spain and Portugal are in seriously bad shape. Banks in Europe are on the hook, he says, as are many banks throughout the U.S. that have been playing interest-rate arbitrage, borrowing at a quarter of a percent and lending to Italy for 6% and Greece for 9%, for example.
“For anyone in the know, its a catastrophe in the making,” Sica says. “Bottom line: A financial crisis worse than the one that took place in 2008 and 2009 could ignite at any moment.” And because many Europeans take the month of August off, the first emergency meeting to address the euro and the danger isn’t scheduled until Sept. 6th, in France. Europe is a dark cloud getting darker by the day, Sica says.
Another concern is China, points out Matt Freund, senior vice president of investment portfolio management at USAA. What if the Chinese economy falters — a scenario that seems much more likely than it did as 2010 ended? Real estate and construction have become dominant sectors in China’s economy, but easy credit and speculative building may be creating a surplus in luxury apartments and other properties that sets the stage for a major correction.
A reversal of China’s economic fortunes could have wide-ranging effect. It could lower demand for industrial and construction equipment, dampening revenues for the companies that make it; weaken demand for commodities, which could pressure the emerging-market economies that depend on them; and reduce overseas profits for large multinational corporations as growth stalls around the world.
What are Investors to Do Now?
A confluence of such factors are creating plenty of uncertainty. Investors are wondering what in the world they can expect from the market for the rest of this year.
“Given the debt deal, the likelihood of another stimulus package is decreased,” says Steve Wood, chief market strategist for Russell Investments.
And that will slow the recovery, says John Liu, president of Firstrade, an online broker. “Without government help, the market is going to get worse before it gets better,” he says. “It doesn’t mean it won’t get better, it will just take longer.”
Sica predicts that the market will decline 15%-20% by the end of the summer. Given the economic headwinds, it’s hard to envision a return to a robust and steadily growing economy anytime soon.
Investors should expect the recovery to remain choppy and uncertain, marked by below-average economic growth and periodic setbacks — including the potential for another recession, Freund says.
For sure, the outlook suggests investors should tighten their seatbelts and brace themselves for one jolt after the other. How can you protect yourself? Here’s what the pros are suggesting:
Keep your cool
“Don’t panic, and keep your emotions in check,” says Thomas Yorke, a Covester model manager and managing director of Oceanic capital Management. “These movements should flush out some of the more leveraged players and provide an opportunity to make some selective buys at a significantly lower levels. In situations like this, most investors are more likely to sell their best performers and hold their worst — the trading in gold today being a prime example of that behavior. When you are ready to make some adjustments, make sure you pitch your poor performers and opt for the market leaders who apt to recover more quickly.”
This is the time to re-evaluate your portfolio and determine how diversified you truly are, Yorke advises. But keep in mind that the correlations between different asset classes will converge at times like these, when the market is moving downward so strongly, he says. “You should study what classes performed best and plan to increase your exposure to them when things start to return to normal,” he says. “Doing this during high-stress periods will more likely have you buying things too expensively and selling things too cheaply. Your goal should be to create the proper asset allocation and understand that
over time this more balanced approach will achieve a better ‘risk adjusted’ return and enable you to sleep better at night.”
If you are a long-term investor, take a deep breath and stay the course, says Mark Fissel, a certified financial planner with Beacon Hill Investment Advisory. From the standpoint of price-to-earnings ratios, or stock prices compared to company earnings, the stock market is the cheapest its been since 1990. So, yes, there’s great uncertainty, but that also means there’s an opportunity to make money. By the time the sky is blue, the market will have already gone up, Fissell says.
Fred Dickson, senior vice president and chief investment strategist with D.A. Davidson & Co., has similar advice to investors: Find the upside. Use the recent 10% market dip to invest in high-quality stocks that have a long history of increasing dividends, he says.
August 5th, 2011
By: The Associated Press
Global stock markets tumbled Friday amid fears the U.S. may be heading back into recession and Europe’s debt crisis is worsening. The sell-off follows the biggest one-day points decline on Wall Street since the 2008 financial crisis.
Oil extended sharp losses to fall below $85 a barrel amid expectations a slowing global economy will undermine demand for crude.
In Europe, major markets fell, adding to losses Thursday. London’s FTSE 100 declined 3.5 percent to 5,393.14 and Germany’s DAX shed 3.8 percent to 6,172.00. France’s CAC-40 lost 2.5 percent to 3,238.80.
Wall Street was set for a lower open with Dow futures down 0.8 percent at 11,280 after Thursday’s 512.76-point fall, the steepest point decline since Dec. 1, 2008. S&P 500 futures fell 0.6 percent to 1,191.7.
Japan’s Nikkei 225 stock average slid 3.7 percent to 9,299.88 and Hong Kong’s Hang Seng dived 4.3 percent to 20,946.14. China’s Shanghai Composite Index lost 2.2 percent to 2,626.42.
“Losses today have been indiscriminate,” said IG Markets strategist Ben Potter in a report. “The big question on everyone’s mind is what will happen across European and US markets tonight and will there be any form of emergency policy response?”
Investors fretted over the U.S. economic recovery ahead of Friday’s release of crucial jobs figures for July, which often set the tone in markets for a week or two.
Many were also rattled by the lack of agreement in Europe about debt and how to stabilize the euro, said Tom Kaan of Louis Capital Markets in Hong Kong. He said they were watching to see if the U.S. Federal Reserve launches a new stimulus effort.
“It’s a general fear that is clouding the markets at the moment,” Kaan said.
Elsewhere in Asia, South Korea’s Kospi sank 3.7 percent to 1,943.75 and Taiwan’s benchmark skidded 5.6 percent to 7,853.13. Australia’s benchmark dropped 4 percent to 4,105.40 and India’s Sensex was down 2.8 percent to 17,196.06.
In China, state-owned oil producer CNOOC Ltd. plunged 7.7 percent. China Construction Bank Ltd., one of the country’s four major state-owned banks, lost 2 percent and Ping An Insurance Ltd. declined 3.9 percent.
Investors, already fidgety after protracted political bargaining to raise the U.S. debt limit and worries that Italy and Spain are getting deeply embroiled in Europe’s debt crisis, searched for assets considered safer such as gold.
“Stocks will continue to dive, especially in Euroland, where profits are disappointing analysts’ estimates,” said Carl B. Weinberg of High Frequency Economics in a report.
In currency markets, the dollar edged down to 78.48 yen from late Thursday’s 79.02 and the euro gained to $1.4153 from $1.4130.
On Thursday, Japan’s government intervened in markets to weaken the yen against the dollar to support exporters. Finance Minister Yoshihiko Noda said authorities acted to protect the economic recovery following the March 11 earthquake and tsunami.
The dollar had fallen as low as 76.29 yen on Monday. It hit a record post-World War II low of 76.25 yen in the days following the March 11 earthquake and tsunami.
The intervention was coupled with monetary policy easing by the central bank’s board.
Japan’s moves came only a day after the Swiss National Bank intervened to slow a rise in the Swiss franc, another currency perceived as a save-haven at a time investors are fleeing risky assets such as shaky European government bonds.
Benchmark oil for September delivery was down $1.68 to $84.95 a barrel in electronic trading on the New York Mercantile Exchange. Crude tumbled $5.30 to settle at $86.63 on Thursday.
August 5th, 2011
Fears about the global economy led to the biggest panic in financial markets since the 2008 financial crisis. The Dow plunged nearly 513 points Thursday, its biggest point decline since Oct. 22, 2008. Only three of the 500 stocks in the Standard & Poor’s 500 index had gains. Oil fell by 6 percent. The yield on the two-year Treasury note hit a record low as investors sought out relatively stable investments.
All three major stock indexes are down 10 percent or more from their previous highs, a drop-off that is considered to be a market correction. A drop of 20 percent or more signifies the start of a bear market, an extended period of stock declines.
Investors are increasingly concerned about the possibility of another recession in the U.S. and a debt crisis in Europe.
“We are continuing to be bombarded by worries about the global economy,” said Bill Stone, chief investment strategist at PNC Financial.
The Vix, a measure of investor fear, shot up 36 percent. It is up 92.6 percent for the quarter, which began July 1.
The Dow Jones industrial average was down 512.61 points, or 4.3 percent, to 11,11,383.61. Thursday’s losses turned the blue-chip stock index negative for the year.
The S&P 500 – the benchmark for most mutual funds – lost 60.20, or 4.8 percent, to 1,200.14. It is now down 12 percent from its recent high of 1,363 reached on April 29. The Nasdaq composite shed 136.68, or 5.1 percent, to 2,556.39.
Oil dipped to $87 a barrel on worries demand will fall because of the slowing economy. It had traded over $100 as recently as June 9.
Nearly 20 stocks fell for every one that rose on the New York Stock Exchange.
European stocks also fell broadly because of concerns that Italy or Spain may need help from the European Union. The benchmark stock indexes in Italy, Germany and England each fell 3 percent.
Stock trading has been volatile this week because of concerns that the U.S. economy is weakening. Manufacturing, consumer spending and hiring by private companies are below levels that are consistent with a healthy economy. Those reports have called into question estimates from economists, including Federal Reserve Chairman Ben Bernanke, that the economy will grow more quickly in the second half of the year.
Money poured into investments that are seen as relatively safe when markets are turbulent. The yield on the 10-year Treasury note fell to 2.42 percent, its lowest level of the year. The yield on the 2-year Treasury note hit a record low of 0.26 percent. Bond yields fall when demand for them increases.
Mark Luschini, chief investment strategist for Janney Montgomery Scott, an investment firm in Philadelphia, said some clients are moving to cash “as a parking lot to sort things out.”
“With the scars of 2008 still fresh, some clients don’t want to miss the chance to pre-empt further damage should it come,” Luschini said.
Large investors have moved so much money into cash accounts at Bank of New York that on Thursday the bank said it would begin charging some clients a 0.13 percent fee to hold their cash.
“In the past month, we have seen a growing level of deposits on our balance sheet from clients seeking a safe-haven in light of the global interest rate and credit environment,” the bank said in a statement to The Associated Press. Bank of New York clients include pension funds and large investment houses.
“Investors are deciding that now is the time to take risk off the table,” said Brian Gendreau, market strategist for Cetera Financial Group. Gendreau said that some investors are now wondering whether stocks will have a prolonged slump similar to the aftermath of the Great Depression.
Technical trading, a term used to signify buying or selling based on the S&P 500′s prior highs and lows, also helped push stocks downward. The S&P 500 fell below 1,222, a so-called support level, early in the day. That signified to some traders that the stock market would continue to slide.
“Traders are respecting the technical levels even if they’re not technicians,” said Quincy Krosby, market strategist at Prudential Financial. “Even if you’re what we call a conviction buyer, you have to respect those levels.”
Companies that outperform when the global economy expands fell the most. Alcoa fell the most, with a 9 percent drop. Bank of America and Caterpillar were down 7 percent. Boeing ended down 6 percent.
Some traders are selling ahead of Friday’s employment report, which is expected to show that unemployment remained at 9.2 percent last month. A rise in the unemployment number would likely push stocks lower again.
The U.S. government said before the market opened that the number of people who applied for unemployment benefits for the first time was only slightly lower last week to 400,000. That’s still above the 375,000 level that economist say indicates a healthy job market. It was the latest indication of weakness in the U.S. economy.
All 10 industry groups in the S&P index fell. Energy, materials and industrial companies each lost 5 percent or more.
The sell-off comes at a time when corporate profits are growing. The forward price to earnings ratio of the S&P 500 has fallen to about 12, well below its long-term average of 16. That means that investors who buy now are paying less for each dollar in profits.
Based on what an investor now pays for corporate profits, stocks are now trading at their lowest levels in 20 years, said Tim Courtney, chief investment officer of Burns Advisory Group in Oklahoma City.
Few companies were spared in the sell-off. Just 3 of the 500 stocks in the S&P 500 moved higher. General Motors Co. fell 4 percent despite beating analyst’s earnings estimates.
The stock market as a whole had its biggest fall since the start of the current bull market in March 2009. The drop in the S&P was the largest since a 45-point decline on January 20, 2009. The Dow is down 1.7 percent for the year. The S&P 500 is down 4.6 percent. And the Nasdaq is down 3.6 percent. The Russell 2000, an index made up of small companies, has fared the worst. It was down 5.6 percent Thursday and is down 7.3 percent for the year.
July 19th, 2011
The Economic Collapse
Can you smell it? There is blood in the water. Global financial markets are in turmoil. Banking stocks are getting slaughtered right now. European bond yields are absolutely soaring. Major corporations are announcing huge layoffs. The entire global financial system appears to be racing toward another major crisis. So could we potentially see a repeat of 2008? Sadly, when the next big financial crisis happens it might be worse than 2008. Back in the middle of 2008, the U.S. national debt was less than 10 trillion dollars. Today it is over 14 trillion dollars. Back in 2008, none of the countries in the EU were on the verge of financial collapse. Today, several of them are. This time if the global financial system starts falling apart the big governments around the world are not going to be able to do nearly as much to support it. That is why what is happening right now is so alarming. As signs of weakness spread, the short sellers and the speculators are starting to circle. They can smell the money.
Back in 2008, bank stocks led the decline. Today, that appears to be happening again. The “too big to fail” banks are getting absolutely pummeled right now. Most people don’t have much sympathy for the banksters, but if we do see a repeat of 2008 they are going to be cutting off credit and begging for massive bailouts once again, and that would not be good news for the economy.
In Europe, the EU sovereign debt crisis just seems to get worse by the day. Bond yields for the PIIGS are going haywire. The higher the yields go, the worse the crisis is going to get.
Meanwhile, as I have written about previously, a bad mood has descended on world financial markets. Pessimism is everywhere and fear is spreading. The short sellers and the speculators are eager to jump on any sign of weakness. Investors all over the globe are extremely nervous right now.
So what happens next?
Well, nobody knows for sure.
But things certainly do not look good.
The following are 18 signs that global financial markets smell blood in the water….
#1 Banks stocks are absolutely getting hammered right now. Bank of America hit a 52 week low on Monday. Bank of America shares declined 4 percent to $9.61.
#2 So far this year, Bank of America stock is down about 27 percent.
#3 Bloomberg is reporting that Bank of America may be forced to increase its capital cushion by 50 billion dollars.
#4 Shares of Goldman Sachs and Morgan Stanley are near two year lows.
#5 Shares in Citigroup fell 2.5 percent on Monday.
#6 Moody’s recently warned that it may be forced to downgrade the debt ratings of Bank of America, Citigroup and Wells Fargo.
#7 Barclays Capital, Goldman Sachs, Bank of America, JPMorgan Chase and Morgan Stanley are all either considering staff cuts or are already laying workers off.
#8 The deputy European director of the International Monetary Fund says that the Greek debt crisis is “on a knife’s edge”.
#9 Moody’s has slashed Ireland’s bond rating all the way to junk status.
#10 The yield on 2 year Portuguese bonds is now over 20 percent, the yield on 2 year Irish bonds is now over 23 percent and the yield on 2 year Greek bonds is now over 35 percent.
#11 Shares of Italy’s largest bank dropped by a whopping 6.4% on Monday.
#12 On Monday, the yield on 10 year Italian bonds was the highest it has been since the euro was adopted.
#13 On Monday, the yield on 10 year Spanish bonds was also the highest it has been since the euro was adopted.
#14 Shares of Germany’s largest bank fell by a staggering 7% on Monday and are down a total of 22% so far this month.
#15 Citigroup’s chief economist, William Buiter, says that without direct intervention by the ECB there is going to be a wave of sovereign defaults across Europe….
#16 Cisco has announced plans to axe 16 percent of its workers.
#17 Borders Group has announced that it will be liquidating all remaining assets. That means that 399 stores will be closed and 10,700 workers will lose their jobs.
#18 During times of great crisis, many investors seek safe havens for their money. On Monday, the price of gold shot past $1600 an ounce.
These are not normal financial times. The worldwide debt bubble is starting to burst and nobody is quite sure what is going to happen next. Certainly we are going to continue to see financial authorities all over the world do their best to keep the system going. But as we saw in 2008, things can spiral out of control very quickly.
Just remember, back at the beginning of 2008 very few people would have ever imagined that the biggest financial institutions in America would be begging for hundreds of billions of dollars in bailouts by the end of that year.
When confidence disappears, the game can change very quickly. To the vast majority of economists it would have been unimaginable that the yield on 2 year Greek bonds would be over 35 percent in mid-2011.
But here we are.
The entire global financial system is a house of cards built on a foundation of sand. It is more vulnerable today than it has been at any other time since World War II. When a couple of major dominoes fall, it is likely to set off a massive chain reaction.
The global financial system of today was not designed with safety and security in mind. It was designed for greedy people to be able to make as much money as possible as quickly as possible. The banksters don’t care about the greater good of mankind. What they care about is making huge piles of cash.
There is way too much risk, way too much debt and way too much leverage in the global financial marketplace. You would have thought that 2008 should have been a major wake up call for financial authorities around the world, but very few significant changes have been made since that time.
The financial news is just going to keep getting worse. This financial system is simply unsustainable. It is fundamentally unsound. The reality is that financial bubbles cannot keep expanding forever. Eventually they must burst.
Over the next few weeks, keep a close eye on banking stocks and keep a close eye on European bond yields.
Hopefully things will stabilize.
Hopefully the next wave of the financial collapse is not about to hit us.
Hopefully the entire global financial system is not on the verge of a major implosion.
But you might want to get prepared just in case.
June 2nd, 2011
The Raw Story
By: Jesse Eisinger, Pro Publica
It has been noted repeatedly that almost no top bankers have faced serious consequences for their actions in the financial crisis. But there is a Wall Street corollary that might be even more pernicious: good guys are punished.
Whistle-blowers, truth-tellers and fraud-spotters pay a miserable price on Wall Street. They are vilified. They are fired. Sometimes they are even sued. Instead of being sought after, they become persona non grata.
Recently, I caught up with David Maris, a one-time star pharmaceutical analyst for Bank of America who became embroiled in one of the most notorious bull/bear battles of the last decade. His story encapsulates just how broken Wall Street culture is.
In 2003, Mr. Maris put out a sell report on Biovail, a Canadian drug company. He fixed on the company’s bizarre explanation of why it had missed its earnings estimates: a truck carrying a supposedly huge amount of medicine crashed at the very end of the quarter. Mr. Maris detailed why this was wildly implausible.
Desperate to deflect the attention, Biovail took the offensive. It sued Mr. Maris and Bank of America in early 2006. It also sued SAC Capital Advisors, the hedge fund, and Gradient Analytics, an independent research firm, claiming a giant conspiracy to drive down its stock price with false reports.
For a time, Bank of America stood by Mr. Maris. But it eventually caved and fired him 2014 two weeks before the end of 2006, enabling it to not pay his bonus. Mr. Maris is now in arbitration, seeking $21 million in back pay.
“For the first few days, there were high-fives and a lot of media attention,” Mr. Maris said. “People said this is what research should be. But then reality strikes the bank.” Lawsuits and media coverage are unpleasant and unwanted.
Bank of America said: “Mr. Maris’s departure was not connected to Biovail issues or to his research regarding that company. Bank of America values the independence of its research and has a longstanding practice of protecting that independence.”
It turns out there was a fraud and a stock-manipulation scheme all along. But regulators said that it had been perpetrated by Biovail, not the analysts and hedge funds.
In March, Biovail settled with the Securities and Exchange Commission, which had accused the company and four current and former officers, including its former chief executive, Eugene Melnyk, of accounting fraud. Mr. Melnyk, who at one time was reported to be a billionaire, left in 2007.
Only this year, he settled with the S.E.C. and the Canadian securities regulators, paying paltry fines. Biovail didn’t admit or deny wrongdoing. (Biovail settled with the regulators over other, unrelated charges in 2008. The company merged last year with Valeant Pharmaceuticals International, losing the Biovail name.)
In recent years, Biovail retreated from virtually every allegation it made in its lawsuit. It dropped its claims against Mr. Maris and Bank of America in 2007. As part of a settlement, Mr. Maris agreed not to countersue.
The company also paid $10 million to SAC and forked over $138 million to settle a shareholder lawsuit.
So here’s the final Biovail vs. Maris scorecard: Mr. Maris was right on the facts. He was right on the stock. He was right with the law.
For his success, he was sued, fired and stripped of compensation. He also lost access to the world of bulge-bracket Wall Street, was shunned by some institutional investors, and because of the settlement for which he said he felt he had no choice than to enter, he couldn’t sue Biovail to seek vindication.
It’s well known that analysts rarely put sell ratings on the stocks they cover. Typically, the explanation for this is that banks don’t want to jeopardize their investment banking business.
The reality is much more complicated. Skeptics and whistle-blowers risk huge career costs that go beyond conflicts of interest. Investors think they want unvarnished advice, but many don’t truly appreciate it. Most banks don’t want employees to play detective. Regulators abandon whistle-blowers, acting tardily and ineffectually.
After he was fired, Mr. Maris found that other big banks didn’t want to hire him for research jobs. Even some institutional investors and hedge funds, which one might imagine would appreciate a skeptical voice, wanted no part of him. Many investors think an analyst who is picking fights with companies is a glory hound, and the last thing they want is publicity. No matter how frivolous, a lawsuit tars both sides. This is the “Tonya and Nancy” problem, after Tonya Harding and Nancy Kerrigan. One was linked to the perpetrators and one was the victim. But now they are forever linked, and the difference between the two almost becomes blurred.
I don’t want to create the impression that Mr. Maris is suffering. He isn’t. He works at CLSA, a relatively unknown but important research shop, owned by a French bank that encourages its analysts to pursue independent lines of inquiry. Another analyst who has long been a truth-teller on banks, Mike Mayo, has also landed there.
But because Mr. Maris is willing to be publicly negative on stocks, he continues to face obstacles. He is prevented from asking questions on conference calls. Companies don’t allow him to bring clients on visits. Some clients seem concerned about the lawsuits in his past.
“If you asked me what’s my advice for a young analyst who wants to be in business for a long time, I wouldn’t tell them to follow the path I went,” he says. On Wall Street, “everyone knows you play ball or live with the consequences.”