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Archive for December 12th, 2009

Now Let Us Admire The Clever Way In Which Bank Of America Has Screwed Taxpayers Again (BAC)

 

A few media outlets cheered the announcement that Bank of America was repaying its $45 billion of bailout money ahead of time.  Bank of America is now obviously healthy again, so it’s time to celebrate, right? Well, no.

The main reason Bank of America paid back the money was to get out from under the onerous pay caps that makes it harder to keep its people and attract a new CEO.  To make the payment, Bank of America had to take huge dilution at what a year ago would have been considered an appalling price.  Bank of America may be healthier than it was 9 months ago (maybe), but shareholders certainly didn’t consider selling $19 billion of equity at $15 a share cause for celebration.

But aren’t taxpayers better off now that Bank of America has paid us back? 

Not if you thought the control and pay restrictions TARP provided were a good thing.

What Bank of America has done is simply replace one form of taxpayer sponsored capital (TARP) with equity and another form of taxpayer sponsored capital–loans from the Fed.  Those loans carry super-low interest rates , so they’ll help Bank of America make more money at taxpayer expense.  Those loans also, importantly, come with NONE of the restrictions that TARP does.

 

In case you’re not following exactly what happened here, let us explain:

Bank of America raised $19 billion of new equity.  It paid the government $45 billion of TARP funds back.  To make up the difference, it borrowed $26 billion of new funds from the Fed (at a subsidized rate, no less).

And taxpayers are on the hook every bit as much with the Fed loans to Bank of America as they were for the TARP capital.  The only thing that has changed is that taxpayers don’t have any control anymore.  Bank of America can now take that money and do whatever it wants with it, including paying out tremendous bonuses for making stupid loans.

And, god forbid, if Bank of America isn’t healthy and gets itself into trouble again, taxpayers will be right there to bail it out again.

Because this is America, land of bailouts.  And TARP-free Bank of America is still too big to fail.*

 

The Retarded Recovery

By Bill Bonner

12/11/09 Dakar, Senegal – Nothing is quite as disagreeable as a neighbor who has made a lot of money by not following your advice. After 9 months of ‘recovery’ they are all around us. They think they have perfected the art of bubble riding.

Here on the back page, we alert investors. We wag our fingers and shake our heads. Little good it does. We might as well warn surfers about an approaching storm. They don’t head for cover; they rush to the beach, hoping it’s not too late to catch a big one.

As of this week, investors are still making money. Almost everything has outperformed cash over the last 9 months. Stocks, commodities, gold – you name it. This wouldn’t be happening were it not for the government. The feds are making waves from Malibu to Manila. ‘Don’t worry about the depression,’ they tell us; ‘we’re on the case.’ That, of course, is what we’re worried about.

Instead of allowing things to settle down, the feds are doing all they can to keep them stirred up. Amid the foam and splash, nobody knows what is really going on. For example, they’ve driven the yield on cash down to near zero. What’s a borrower to think? Why are interest rates so low? Are there so many trillions in idle savings that he can have them for nothing?

Investors don’t know whether they are coming or going either. They’re buying S&P stocks at more than 80 times earnings, while people who know what they are doing – the insiders – dump 82 shares for every one they purchase.

And in the economy, last Friday, came a puzzling report from America. According to the feds, unemployment dropped by 0.2% last month. That leaves only 15 million without work. Another report tells us that each job created by US government stimulus costs $246,000. What were they hiring, bankers?

While the feds muddy the waters, the de-leveraging of the American consumer continues. Consumer credit fell in the US in October, for the 9th month in a row. As long as consumers are cutting back there is no way a real recovery can begin.

What to make of it all? We turn to a ghost for an explanation. Friedrich Hayek described a similar situation 76 years ago:

“There can…be little doubt that …a deflation process is going on…Central Banks, particularly in the United States, have been making earlier and are more far-reaching efforts than have ever been undertaken before to combat the depression by a policy of credit expansion – with the result that the depression has lasted longer and has become more severe than any preceding one.

“…all conceivable means have been used to prevent the readjustment from taking place; and one of those means , which has been repeatedly tried though without success, from the earliest to the most recent stages of depression, has been this deliberate policy of credit expansion… To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about…”

He could have been describing Japan’s 20-year depression, too. So far, we have no evidence that the authorities can improve a depression. All we know is that they can stretch it out.

A real recovery is a process of discovery: it begins in misery and ends in prosperity. Investors figure out what their boom-era investments are really worth. Businessmen figure out how to turn a profit in a new environment. Households learn how to match their incomes against their expenses in a world where credit is less forthcoming and jobs are harder to find. Needless to say, the faster these discoveries are made, the better.

But the first thing people realize is that they have been idiots. Then, they call for the government to prove it isn’t so. In Britain, the government has spent about $8,000 per family to bail out the banking sector. As a result, we don’t get to discover what the bankers would do if they were forced to seek honest employment. Nor do we discover what the poor taxpayers would have done with that $8,000 if it hadn’t been forcibly transferred to the City.

Likewise, what we want to know about an insurance company is how well it holds up under pressure. But when the feds rushed in to save AIG they corrupted the facts. Then, in the US alone, there were Bear Stearns, Citigroup, Washington Mutual, General Motors, Chrysler, Fannie Mae and Freddie Mac, not to mention the small fry. Our curiosity remains unsatisfied; what kind of world would it be if they had gotten what they deserved?

Alas, the feds have created a world of darkness and depression. No one knows anything. And what they think they see clearly is often a mirage. Employers don’t know whether to hire or fire. Consumers are blind too; they don’t know whether things are getting better or worse. Finally, government even pokes its own eyes out. Relying on ‘funny money’ to cover its deficits, it has no idea how far it can go before it falls off a cliff.

Regards,

Bill Bonner,
for The Daily Reckoning

What it is ain’t exactly clear…

Does this chart with the precipitous fall and the rising wedge look familiar? This is a weekly chart of the DOW from 1929 and into 1930. Note the last positive weekly candle and that it finished at roughly a 53% retracement, just above the 50% mark.

Now take a look at this weekly chart of the DOW, look kind of similar? Yep, big fall, big bounce, rising wedge. Note the last weekly candle is a hammer and that it’s getting just above that 50% retrace mark:

So, while this bounce has been spectacular, it is most certainly NOT unprecedented. Now, there’s a chance that the similarities end right here and we go rocketing higher. Hey, history never duplicates but it does often rhyme. What’s the risk if it does rhyme? Oh, nothing much.

So, you have to ask yourself, are the underlying forces that produced that wave C different this time? Have we entered a new, more modern era where things like that just don’t happen because we are so much smarter? Remember what was being said about the internet in the year 1999 and what the experts said about the valuations in the market being the new norm? It’s just different this time, isn’t it?

I mean back then we were on a gold standard that held the quantity of money constant, RIGHT?

Hmmm… well, according to Wikipedia discussing the gold standard during the Depression, “Fearing imminent devaluation of the dollar, many foreign and domestic depositors withdrew their funds from U.S. banks in order to convert them into gold or other assets. Since the gold standard depressed demand for dollars, interest rates rose.”

Sound like anything familiar? Umm, let’s see, converting to gold and other assets, CHECK! Umm, Interest rates rose? Oh, oh…

LONG BOND:

Long Bond P&F target = 94:

So, back to the gold standard keeping the supply of money under control… let’s take a look at this chart of debt dating back to 1920… Yes, that is a parabolic rise in debt, and note the year the debt peaked – it wasn’t 1929, no, it peaked in the year 1932, the same year the stock market finally bottomed. Did gold really keep the supply of money under control?

And get a load of the direction of debt now! Will our current curve just continue straight up like that forever and ever? NO! It will begin to fall, THAT is when we will be on the road to recovery. But because of the government pumping trillions and trillions in new debt, that is not being allowed to happen – yet.

Now, let’s look at a seven month and a 3 year chart of the dollar. Here you see a descending wedge and a clear breakout higher. Note that stock prices have remained flat while this breakout has occurred. Look back at this chart at rising dollar times and look at the action in stocks, then do the same on the longer term dollar chart:

Since March, Oil has risen right alongside the market while the dollar fell. Now we have a clear breakdown in oil that coincides with the breakout in the dollar:

Next is a longer term chart showing the correlation between oil prices and stock prices. Not always perfect, but in general, falling oil has equaled falling stocks… will this time be different?

And finally, I was playing around with the charts over at the St. Louis Fed like I like to do and I came up with a chart that at first glance just looks like a bunch of squiggly lines, but I want you to look at this carefully. There is a thin horizontal line sitting at about 1 to 2%… that line is the population of the United States, growing steady.

Now, I took and drew the large line across the chart at ZERO. The other lines are PPI, CPI, and M2 money supply. In other words, money and prices. Now pull back from the chart and just look at the balance… money and prices predominate at a growth rate much greater than zero and MUCH greater than the growth in our population. There are only momentary corrections. This is the essence of the bad math! Over time these numbers compile upon themselves, eventually producing parabolas and collapses. Why do we do that to ourselves? It’s a function of the way we back our money with debt! That causes bankers and politicians to always produce more. This is NOT a natural state of being, it sets up a very unstable economy, one where the swings get larger and so do the inputs, as we’re experiencing now!

Is it just me, or is there something happening here?

Once again, Mr. Black is sharp as ever and simply tells it like it is…

Bill Black – Part I (5 minutes):

Bill Black – Part II (5 minutes):

From Bloomberg: Volcker Says ‘Basic Structure’ of Economy to Impede U.S. Growth

“We have another economic problem which is mixed up in this of too much consumption, too much spending relative to our capacity to invest and to export,” [said Former Federal Reserve Chairman Paul Volcker] “It’s involved with the financial crisis but in a way it’s more difficult than the financial crisis because it reflects the basic structure of the economy.”
…
“It’s likely that economic growth is going to be pretty sluggish for a while.”

Click image for video or click for Bloomberg VideoVolcker Says Economy’s ‘Basic Structure’ to Slow Growth December 11 (Source: Bloomberg)