Bank Collapse

The market is only correcting its estimatation of overvalued and over leveraged banks. In the 1930 ’s and earlier, lots of small banks failed as they over lent, and other banks, recipients of the worthless bank paper cashed them in causing the former to go bankrupt.

Hence the creation of the FED as an overseer and regulator. In this respect the FED has failed as it became abused by government to promote growth and the illusion of wealth. Now we have the consequences as all the banks will fail.

Each bank will reduce exposure to each other, as has been already happening – hence the cessation of interbank lending. The next stage is to punish an overvalued share price. Imagine sterling in 1992 and multiply the effects, a 1000 fold. In sterling we already seen a 25% drop in value in 6 weeks which is less than the 15 % in 1992. Do you hear the people or politicians complaining??? NO! Who’s doing the selling? – the market, dummies! The sellers are the holders of capital! This is the money moved off the banks’ balance sheet away from the shareholders to the offshore islands.

If you think Citibank has a problem with costs exceeding cash, I suggest you look at the insurance industry in the US. 90% of its assets, I mean cash is sitting in Cayman whilst the liabilities are sitting in the US uncovered. AIG and Harold Greening are just the tip of the iceberg.

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After the nationalisation of GM next spring, expect to see the nationalisation of Ford in mid 2010 at latest. As corporate lending evaporates expect to see most more establish names being nationalised in the pension, airline, pharma and food industries. Stock markets will fall another 50% by this next year.  Ftse below 2500 and DJ and Nikki both below 5000.

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Thanks to the banks greed, this time next year their capital ratios will be much worse. At least 25% worse. increased debt maintenance costs which affect 98% of the population will have increased whilst and the temptation to save has been eradicated by negligible interest rates.

of all profit Couple this with the draw down of all CD’s and the and the redemption of 1 yr savings bonds and other longer bonds expiring in this period,  the banks financing will be left with only with long term bonds of 3 to 5 years duration as capital. Even then the risk of interest confiscation similar to the pension confiscation endowment will result in borrowers trying to redeem long term bonds early. If you are going to lose interest through confiscation, you might as well redeem with no interest penalties.

In addition bank loan defaults will have increased and bad debt exposure will have increased 300% just on normal lending.  Unlike the swaps of bad debt for treasury paper while bank exposure continues to increase and be hidden, this debt will be visible on the balance sheets.

Will this result in the total nationalisation of the banking sector. Of course more good money after bad!

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There is a great article here showing the new state of the Fed’s balance sheet. Even funnier is the reference to Enron style accounting practiced  at this institution  that we  should all trust and respect. Funny that when institution are trusted they generally become corrupt and bankrupt.  As how the State today  mirrors the Church of yesterday!

http://goldnews.bullionvault.com/fed_balance_sheet_111120082

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Obama wins the 2008 Elections with 55.5% of the vote. The results can be found here.  Since 1988 there have only been off by 1.37% More information about this phenomenon can be found in the Wisdom of Crowds by James Surowiecki.

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Who will be the next George Soros?   Or will it be a consortium of  nationalised bank traders (the regulators and central bankers don’t know and can’t do jack shit to stop them) running amok through each of the  worlds’  smaller  economies grabbing  more and more  prizes, leaving the defeated  country to  the inane  policies and handouts of the IMF? As their taste for blood increases and their financial strength increases the Euro and Dollar will fall in their path.

Iceland, Serbia, Ukraine, Hungary, UK soon – sterling 30% down -  and still no IMF appointment yet.

Once the Euro is in their target, our lovely unified politicans will argue for their own self interest,  thereby guanteeing  the Euro  collapse.  There is no way that the Eurozone can fight the tide  of funds selling the Euro. As long last the people of Europe  will be liberated from the inflation of the Euro project.

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Well I was still debating which would fall last the dollar or the Euro. It’s simple whilst the capital flight back to the US creates a global currency crash bigger than the Asian crisis of 1997, the Euro will be pulled apart. Already the nationalised currency vultures are picking on the Greek economy . I am surprised since Italy would have been a good target and I believe  that an attack on  Spanish  Bonds  would  bankrupt  the ECB  in 3 days.

Meanwhile this following explains quite well (better than I can) why gold is  in the doldrums. The rest of the article can be found here.

What about the long term implications of the bailout packages on gold? The possible threats are severe and will very likely lead to higher inflation. The sum of the overall bailout packages has now reached more than $4600 billion, huge isn’t it? The extremely aggressive fiscal and monetary policies now in place are ticking time bombs for inflation in the future. Right now, the world fears about deflation and inflation are not a threat. That’s true, but what happens if the official agencies now in charge are too late to tighten the monetary flood once economies are recovering? Yes, this will lead to a major inflationary backlog of potentially giant proportions.

I believe if very experienced and smart investors such as Mr Jim Rogers see inflation as a very real threat in the future, you should listen to them. You might want to watch this interview “Inflationary Holocaust” by Jim Rogers.  Another interesting interview regarding the same issue and with further implications on currencies such as the dollar, euro and sterling is “Will bailouts risk hyperinflation?”

I picked up the topic of a global currency crisis in previous articles and I’m sure this will happen in the not too distant future. Remember, the value of a currency is in the long term determined by its fundamentals (and not short covering or pure safe haven buying as it happens right now in the US dollar). I expect the old economy currencies will devaluate against the currencies of the emerging countries, particularly Asian countries. They have huge amounts of money, economies with excellent long term growth potential and no hidden financial time bombs. Do you really think the US dollar is stronger or is it more likely that other currencies got weaker against the US dollar? That’s a very important difference.

The US dollar got stronger because of a giant flood of money pouring into the US treasury market. This was safe haven buying at its best. But when the storm calms, do you really think these investors feel comfortable? I don’t think so. In the mid to long term, the US dollar and the rest of the highly inflated global currencies will devalue. It’s also interesting that according to the World Gold Council, CBGA 2 signatories sold only 357 tons gold in year 4 of the agreement, well below the 500 tons ceiling. Are they running out of ammunition or did they finally understand that they’d better hold on to their gold since this is the backbone of their paper money?

So what’s going on in the gold market? Right now, we have a huge wave of paper gold coming into the market and therefore depressing the price of gold. I’m speaking about gold futures that have been sold by large unwinding transactions mainly from hedge funds which have to reduce their exposure or which are liquidated entirely. Lots of margin calls for private and institutional investors also played their part in this game.

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Markets always reflect the real value of something between buyers and sellers. Interest rates are too low and no longer reflect true risk. This is the why there is such a divergence between the Interbank interest rates and the Central Bank rates – the Interbank rate is trading much higher than the central bank rate.

Even then, the Interbank rate is too low. Barclay’s will be paying a coupon of 14 per cent over a fixed term running to 2019 to Dubai and Qatar. The market is more accurate than an arbitrary interest rate. Governments who chose to control the market, via an arbitrary interest rate or an exchange rate will always lose to the market.

Maybe if Barclay’s had paid a higher rate to its depositors in the first place, they wouldn’t need to borrow money to get them out of mess. Mind you, they would have also lent less, and would have avoided the loss of the capital to an overexposed property portfolio.

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Markets always reflect the real value of something between buyers and sellers. It is only when governments interfere with regulation that markets fail.

Take for example central banks. They are not there to control inflation or ensure economic stability. That is modern marketing bullshit. Central Banks are a private consortium of financiers who provide financing to governments in order to protect their banking monopolies. That is why you and I can not set up our own bank or deposit taking service.

Now for the good news Central Banks always fail. From John Law’s Banque  Générale to the first US central bank 1811 to the second US central Bank 1836. If the central bank doesn’t fail then the country fails. The market will either correct a fake banking system internally or fake economic system externally after Gresham’s law has run its full course.

When Governments and central banks try to distort the market either with exchange rates, interest rates or banning gold they will always be made bankrupt.

If central banks never existed, banks would be much more cautious about creating money from deposits. If your bank created too many loans then the other banks would return the issuing notes in exchange for gold. This was the reason that given to set up a protection system for the banks known as the Fed, so that the could orchestrate money supply but without the bank runs. Now we have the biggest bank run in history. Now the banks, the Central banks and the IMF are all under financial strain.

Now you may believe that it was lack of financial regulation that got us into this mess in the first place. Regulation is only there to protect an industry, not its clients.

The FSA in the UK was created in 1987 to stop mis-selling of endowment mortages. Guess who the major seller of these products. Not the independent insurance salesman but the bank staff who were now on commission. So the legislation killed the independent broker industry and moved control of insurance products into the banking sphere.

Now lets look at off balance sheet transactions. Following the 1987 stock market crash, all the companies that had off balance sheet items were the first to go bankrupt. However was legislation introduced to stop this practise? No, in fact, governments started adopting the same practise in collusion with their bankers. What was good for the goose was good for the gander. Hence the rise of PFI and public/private partnerships and the fraudulent accounting where pertinent information from shareholders and taxpayers are left of the balance sheet.

Legislation was also introduced in respect of derivatives trading. Only in so far as protect the markets makers. When you sign you acceptance of trading risk, you are in fact providing an indemnity to the trading house, that you are fully liable for the risk and losses rather than the trading house.

Another example of legislation which protect the market players but not the general public is the Foreign Exchange or Forex market. If you take more than 10000 units of a currency across any border you are committing a crime. However sit behind a desk in London you can move millions in a second.

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I have been reading a lot of complaints about people being closed out early in Etrade resulting in big losses. Now imagine I am a market maker in spread betting or the CFD market, both of which are highly marginalised using a ratio of 10 to 1. For every $1 staked the my client will gain $10 or lose $10 If I use my computer system, I can predict the direction of trading and buy ahead of the curve using my own funds which are greater than the sum of my clients funds. Let’s imagine my clients are 8 buyers and 2 sellers of company abc.com. I sell the clients my stock making a profit, and now I am short so I mark the price down. Now the buyers are losing money and will buy the stock back at a loss and I have covered my position. My computer does this thousands of times per day across my many markets. Of course I can fleece of 80% of my customers and pay out only on the 20%.

Now I am making so much money and with my insatiable appetite for greed, I move in the leisure sector and buy a company such as Hotels.com or one of its two competitors. My clients are looking for a romantic weekend in Paris. They hit my site and find a nice hotel in the 7^th arrondisement. However its a bit expensive at 80 Euros per night so they surf a few other competitor sites and many affiliate sites of mine which give the public, the illusion of choice. Thanks to cookies and internet caching, when they return to the booking form I will have increased the price, using the illusion that there has been a large increase in demand and the supply of rooms has decreased. Neither is true! Now the clients must pay 105 Euros per night. Fantastic profits for me.

Time delay trading is not illegal on the internet. You can even benefit from it if you are one of the lucky ones with Amazon.

Geographic discriminatory pricing is where you alter the prices depending on someone IP address or geographical present and is not illegal. More examples of Adobe, Microsoft Vista, Sony, and Itunes of geographic discriminatory pricingan be found here.

The EU has stopped geographic discriminatory pricing this for the most part in relation to the airline industry. However Easyjet error message GTC70 is a blatant disregard to the EU ruling.

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