Tuesday
Jan202015

The 2015 Financial Meltdown & More

This week, I had the pleasure of being interviewed by Greg Hunter at USA Watchdog regarding my thoughts on the state of the global markets, economies and commodities into 2015.  Here are some key points we covered. For more detail, please check out the video of our interview here.

1) On the Market Meltdown: When I spoke with Greg about 9 months ago, I said that based on logic and the political-economic history I had explored for All the Presidents’ Bankers, there should have already been another major implosion following the 2008 financial crisis. However, there is an element of history that is unprecedented and which has acted as a barrier, albeit tenuous and fabricated, to another full-blown, transparent crisis. The scope of the zero-interest-rate policy and QE programs that emanated from the US Federal Reserve and have unfolded throughout the world are artificially bolstering market and financial interests as populations falter. In the US, this has been greeted by proclamations of economic victory from the Obama administration. In Europe, it’s harder to tweak the employment stats enough to declare the same thing, and hence, official QE programs there are ongoing. At any rate, this prolonged policy of injecting cheap money into the banks and markets, funded by the public due to the very nature of debt-creation and the purchasing of government and asset-backed debt securities, now surpasses any past measures of such activities in terms of scope and length.

The fact that these policies lasted for six years has inflated and distorted bond and stock markets, as well as the books of the world’s largest financial institutions to such an extent, that inherent ‘value’ in any of these areas is impossible to determine. We are living with the instability of a system that is supported by central bank maneuvers and the leveraging of them, not by anything organic or independently sustainable. Because rates are so low, any establishment with access to this cheap capital, or that has other people's money to burn, is creating bubbles by reaching for returns anywhere - in government bonds, stock markets, leveraged loans in debt-intensive firms like oil and gas, and in complex derivative products consisting of currency, commodity and credit elements.

The idea of funding the entire financial system with no exit plan for any non-crisis producing dissolution or resolution for such support boggles the mind.  This global QE period is larger and more insane that ever in history.  Because SO much cheap money is sloshing around the system at its top echelons, not through the real economy, the false appearance of stability has been perpetuated longer than logic would dictate.  But since global QE is not yet over, its benefits will continue to accrue to the same institutions that are already benefitting from it (the ones that leverage capital or sell bonds) until all the QE plans are over - not tapered, but unwound and done. While this transpires, a meltdown will unfold, but slowly. Meanwhile, this next phase of ECB QE will provide markets and banks more temporary solvency. So will the Bank of Japan’s money supply expansion and the People’s Bank of China version. 

2) On Volatility:  Market and economic volatility will increase this year – punctuated with media headlines like ‘unexpected’.  Last year, we had volatility spikes in August, October and December.  This year, we’ve already had spikes in January.  So, the shocks are coming in more closely and the downsides are deeper.  That’s why we are in a transitioning down period.  At the end of this year, we will have a lower bond and stock market.  The financial system will start to unravel more visibly and in a more sustained manner. The Federal Reserve won’t raise rates (or if they do, it will be at the end of the year, and only once, as it will have a brutal impact) because there is no reason to. Real inflation of people’s costs of living might be higher, but with global QE keeping a lid on rates and a boost on bonds, and with the dollar still strong, Janet Yellen will just continue using terms like ‘patiently.’ Every time major market participants get remotely nervous, the market will dump, and the next FOMC meeting’s language will be conciliatory to assuage the nerves of this flawed system.

3) On the US Dollar: The reason the dollar has remained strong, and the reason it will continue to stay strong for now is not because the ZIRP and QE policies are good, not because so much debt on the books of the country is prudent, and not because our debt to GDP ratio is cost-effective.  Printing cheap money to sustain a system for six years is a negligent policy.  Using money to plaster over a banking system that doesn’t work and has only become more concentrated is not a stability-increasing policy.  Nor has any of this cheap money trickled down to the average person. All those things are horrific.  But, what the dollar has going for it is the unique collaboration and power-position of the US government, private banks and the Fed.  The US had a first mover advantage compared to the rest of the world.  Its QE policies were biggest.  The dollar is propped up artificially by these alliances and ongoing maneuvers. Every other country is doing so badly and will continue to, that the dollar has, and will have, a relatively better value for now.  Eventually, this madness has to play out and the dollar will weaken, but we won’t see a “plunge” in the near term because every other country is struggling. Any downside to the dollar will thus be part of a slower meltdown punctuated by extra volatility.

4) On Gold: The same reason the dollar has stayed strong is why gold hasn’t had a major outbreak to the upside. With so much artificial stimulus and systemic manipulation, the paper-dollar and hard-asset gold are behaving in a zero-sum game relationship where real value or economic measures are meaningless. That said, gold prices will increase this year– but also only gradually, just as the dollar will not dump but will decrease gradually, as all of these QE maneuvers continue to play out.  Again, the stock and bond markets will decline as this artificial aid eventually does, and the movements will be marked by volatility to the downside. But since the artificial aid isn’t actually over, the price direction of everything will remained tempered. We have been underestimating the effect of all the support that has been lavished on the markets and into the banks.  That’s why considering the timing of this next phase is critical. There’s going to be a downward impact on markets.  There’s going to be an upward impact on gold.  It’s just not going to be as huge this year.  It’s going to be a more gradual kind of a year.

5) On the Swiss Central Bank Float Move: The Swiss deciding to detach from pegging to the Euro must be looked at from two perspectives that together characterize the kind of volatility and stab in the dark policies in operation this year. On the one hand, the Swiss rejected the idea of increasing gold reserves last year (indicating, among other things, hesitancy and uncertainty in general,) and the SCB has imposed negative interest rates (as has the ECB.) Both of these move are related to global QE. On the other hand, the Swiss don't want to be pegged to a declining Euro that will result from the next round of more ECB bond buying to be announced by Mario Draghi on January 22nd.  In general, these central banks don’t really know what will happen in the short or long term as these QE and bank-supportive policies play out.  The Swiss can opt out of part of these measures, but have no choice on the rest.  To a large extent, their move was a way to balance both sides.

6) On Ongoing Bank Risk and Concentration: The largest 30 global banks (dubbed “GSIB’s” or globally systemically important banks) control 40 percent of lending and 52 percent of assets worldwide. In the US, since the financial crisis, the Big Six banks’ share of assets has increased by 41.4 percent and their share of deposits has increased by 82.4 percent. Because of the largesse of government and Fed policy, that gets spun as economically beneficial to the American population. The Big Six stockpile of cash meanwhile, which is doing nothing for the public, has nearly quadrupled in size. 

In addition, just 10 US banks hold 97 percent of all bank-trading assets. Of those, JPM Chase holds 43.8 percent and Citigroup holds 24.5 percent.  Then, there’s leveraged loans, the 2010s equivalent of subprime loans. The 2014 issuance of collateralized loan obligations, or CLOs, eclipsed that of pre-crisis 2006, run by the same cadre of big banks. In November 2014, regulators found that 1/3 of the $767 billion loans they examined in their annual bank loan review showed “lax reviews of potential borrowers and poor risk management.” Nothing was done about it. Oil and gas loans ($250 billion of them) remain primed for defaults and catalyzing more volatility. Adding to the risk, the top four US derivatives trading banks (JPM Chase, Citigroup, Goldman Sachs and Bank of America) hold $219 trillion of $237 trillion, or 93 percent, of US derivatives. 

That kind of consolidation, nationally and globally is why we’ve had six years of artificially stimulated markets. Those figures are why the benefits of these policies go to the most powerful players but not to anyone else. They are why instability is here to stay and grow.

 

 

Friday
Dec122014

My Holiday Book Recommendations, December 2014.

Here are some of my picks for 2014's thought-provoking books from a political, financial, economic and environmental standpoint. They are available at Indiebound, Amazon, and Barnes and Noble. I’m sure you all have great additions of your own. Enjoy and happy reading!

1) The Death of Money: The Coming Collapse of the International Monetary System by James Rickards, Portfolio Hardcover; 1st edition (April, 2014)

In clear, accessible prose, Jim Rickards dissects the precarious state of money at the hands of the world’s governments, multinational institutions, and central banks.  He reveals the extent of damage prevailing polices have already done to the global economy, what will happen if we continue on this path, and what ordinary citizens and small investors can do to protect themselves from the economic onslaught.

2) Unstoppable: The Emerging Left-Right Alliance to Dismantle the Corporate State by Ralph Nader Nation Books; First Edition (April, 2014)                  

Unstoppable is even-handed, erudite, practical and necessary. Ralph Nader harnesses his lifelong crusade on behalf of the public interest over the corporatist agenda into a treatise that is optimistic and patriotic. He shows that effective Left-Right political alliances aren’t pipe dreams, but historic realities in need of strategic cultivation, for the sake of all of our futures.

3) The Fight for the Four Freedoms: What Made FDR and the Greatest Generation Truly Great by Harvey J. Kaye (Simon & Schuster; First Edition (April, 2014))

In The Fight for the Four Freedoms, professor, historian and patriot, Harvey J. Kaye pens an inspiring account of a critical time in American history, inspired by the FDR’s premise that: “Freedom from want and from fear; Freedom of speech and religion” were crucial principals for all Americans. Comparing the strides that FDR made for the country with the anti-visionary maneuvers of more recent presidents Kaye shows that the way out and upward for the population lays in our past.

4) How America was Lost: From 9/11 to the Police/Warfare State by Paul Craig Roberts (Clarity Press (March, 2014))

In How America Was Lost, Paul Craig Roberts focuses his keen eye and sharp mind on the deterioration of government accountability and morality amidst the rise of hypocrisy and recklessness in the wake of 9/11. Through the tangle of wars, aggression, decimation of privacy, Wall Street protectionism and debt creation since, Roberts is relentless in his well-reasoned criticisms of US leadership from an economic and military standpoint.

5) Bad Paper: Chasing Debt from Wall Street to the Underworld by Jake Halpern (Farrar, Straus and Giroux (October, 2014))

Check out my CSPAN BookTV Interview with Jake:

In colorful prose and through the real life stories about an eclectic collection of characters ranging from felonious thug perpetrators to US veteran victims, Bad Paper exposes the murky world of consumer debt collection. From shiny Wall Street offices through the courtrooms of Georgia to the gritty pit of Buffalo, New York., Jake Halpern traces the movements of a “package” of debt from coast to coast, and reveals the human ramifications of criminal collection practices along the way.

6) The Divide: American Injustice in the Age of the Wealth Gap by Matt Taibbi (Author) Molly Crabapple (illustrator) (Spiegel & Grau; First Edition (April, 2014))

Matt Taibbi once again combines punching prose, on-the-ground reporting, and a sharp cynical eye for the absurd.In The Divide, he examines the two worlds that define our times – the one of the privileged elite that can dodge legal ramifications for mega-crimes, and the other citizens on the losing side of the economic and legislative system that are most impacted by financial wrongdoings yet liable to be arrested for not being wealthy enough to commit really large crimes,

7) Too Big to Jail: How Prosecutors Compromise with Corporations by Brandon L. Garrett (Belknap Press (November, 2014))

Garrett has compiled the most extensive database of corporate settlement information available today to shine a light not only on the manner in which corporations skirt the law, but also on what must be done to curb them. Too Big to Jail is a cogent, exhaustively researched plea for more equitable legal oversight. Here is the rest of my review in the National Memo.

8) Unveiled Threat: A Personal Experience of Fundamentalist Islam and the Roots of Terrorism by Janet Tavakoli  (Lyons McNamara LLC (November, 2014))

Janet Tavakoli, primarily known for works on Credit Derivatives and for her thriller about finance and the Vatican, shows her versatility as a writer and thinker in Unveiled Threat. Drawn from her personal experiences during Iran's Islamic revolution of 1978-79 and a plethora of research collected since, Tavakoli reveals the extent to which Fundamentalist Islam is at odds with basic freedoms and rights.

9) Carbon Shock: A Tale of Risk and Calculus on the Front Lines of the Disrupted Global Economy by Mark Schapiro (Chelsea Green Publishing (August, 2014))

In Carbon Shock, Mark Schapiro transcends standard discussions about the culprits and ramifications of climate change and takes us on a harrowing, international exploration of the economic costs of carbon emissions. He exposes the multinational corporate obfuscation of these costs and outlines his long-term solutions.

10) This Changes Everything: Capitalism vs. the Climate by Naomi Klein  (Simon & Schuster (September, 2014)

In This Changes Everything, Naomi Klein examines climate change in the context of rapacious capitalism accelerating its destruction of the planet, enhancing inequality and pulverizing economies. She evenly examines climate-change by detailing its deniers and overzealous activists, concluding  that the market isn't going to stop the crisis that must be stopped nonetheless for all of our sakes. Klein details the efforts of those doing something about it leaving us with hope.

11) The 2001 Anthrax Deception:  The Case for a Domestic Conspiracy by Professor Graeme MacQueen.

Graeme MacQueen’s well-researched book analyzes the October 2001 Anthrax attacks. He examines how the media and Bush administration spin about the threat of bio-terror was used to pass the Patriot Act and to establish a connection between Saddam Hussein and 9/11. Whatever one’s thinks about 9/11; he provokes the question of whether the attacks were created or leveraged to rally Iraq War support.

12) Social Insecurity: 401(k)’s and the Retirement Crisis by James W. Russell (Beacon Press, April, 2014)

James Russell’s book, Social Insecurity, will enrage citizens of all ages and political persuasions, illuminate them about the pillaging of their economic futures by the financial industry, and incite them to action. More than a description of a retirement system coopted by predatory bankers and fund managers, Social Insecurity is also a passionate account of the complicity of the global political elite and a plan of change.

13) In the Shadow of Saint Death: The Gulf Cartel and the Price of America's Drug War in Mexico by Michael Deibert (Lyons Press, June 2014)

Michael Deibert is one of those rare journalists that plunges himself into the most bloody and tumultous conflicts in the world, having written two prior books on his experiences in Haiti and the Congo. His latest book, In the Shaodw of Saint Death, takes him to the bowels of the Mexican drug wars, from which he chronicles the devastating consequences of cartel battles and the impact of US drug policy. An eye-opening, harrowing read.

Friday
Dec052014

Steaming Mad about a Big Bank Con: Email from a Concerned Senior

Everyday I receive anguished emails from concerned citizens regarding the state of the economy, Wall Street, the political-financial system, and how their future stability is impacted by the powers that be. This one stood out for its clarity, as well as being indicative of one of the many ways in which the banking system regularly undermines people’s economic stability by targetting their savings accounts (which thanks to the Fed's zero-interest-rate policy receive no interest, and thus, no relatively risk-free returns) for high-fee asset management services.

The Clinton administration’s 1999 repeal of Glass-Steagall, plus the two prior decades of various measures that weakened the intent of this 1933 Act that separated banks’ speculation activities from deposit and lending ones, has enabled big banks to engage in all manners of trading, leverage, and ill-concocted investment schemes, while holding trillions of dollars of individuals’ deposits.

It was Charles Mitchell, head of National City Bank (now Citigroup) back in the 1920s that realized if his bank could corner the deposits of ‘the Everyman’, it would be better positioned to engage in the bigger transactions that would catapult it to a financial superpower, as well as use the accounts for additive domestic gain. Nearly a century later, this aspect of converting depositor/savers to commission-providing risk-takers, provides fees to bankers, absent true responsibility for any related downside (as in the ‘past behavior is not indicative of future results’ small print.)  

But people should not act upon the “guidance” of the investment advisors resident at the very big banks where they keep their savings and other money – this leaves too much room for manipulation of their trust and money. And if legislation and politicians won’t divide these two financial items, people must do so for themselves.

For the evolution of institutionalized, government and central bank supported speculation has left populations footing the bill for bets taken beyond their knowledge and certainly, control. Even those people that believe they are taking the prudent steps with respect to their own financial situations as they approach old-age, are victims of a churn-and-burn mentality that incurs unnecessary fees and bonuses for the perpetuators, at their expense.

Having checked with the writer, who prefers to remain anonymous, I am leaving the contents of this email intact. The writer wanted others to know “how the nation’s banks target senior citizens and steal their life savings.“  These are the warning words I received from one of America’s seniors:

“Unlike many of the banks’ other schemes, this con is entirely avoidable if seniors and their families knew what to watch out for.

Here is how it works:

1. You are a conservative saver, and you have a large amount of money in the bank.  Since you are a “valued customer”, the bank gives you your own personal financial representative, with whom you build a relationship over time.  But this person is not on your side.  He will prod, coax, and sweet-talk you into moving your savings over to the bank’s investment arm.

2. If you do move your money over to the investment bank, your financial advisor will charge you high management fees (upwards of 1% of assets per year).  Moreover, you will pay big commissions on top of that.  But these won’t be disclosed as commissions – they will be incentives disguised in various ways that are buried deep within the fine print.  Since you don’t know about these, and since you trust the paid professional you’ve hired, you will be an easy victim.

3. Because of these incentives, your advisor will dump investments into your portfolio that may include: funds of funds (which charge layers upon layers of fees), IPO offerings that the bank can’t manage to sell off, complex structured products, variable annuities, and the like.  Anything the bank wants to get rid of, wishes to hawk, or gets a kickback to sell will be dumped into your account.  All the while, your advisor will be assuring you that these are excellent investments.

4. The result will be that you will almost certainly do worse than the market overall – at the very least, by the fees and commissions you pay (commissions that have been taken  –  stolen! – without your consent), and at worst, by scorching losses obtained via inappropriate investments.

5. If you figure out what has happened (and most people don’t, they will think that the market just did badly), you will have little recourse.  The bank will have forced you to sign a mandatory binding arbitration agreement that shuts you out of the court system.  Even if the bank has committed fraud, forgery, etc., it doesn’t matter.  The courts are closed to you.

6. If you manage to obtain a settlement or get a judgment from the arbitration forum, the results will almost certainly be kept confidential.  Therefore, the goings-on are kept quiet, and the banks can continue their practices unabated.

The victims of this fraud are not doing anything wrong or unreasonable.  They are working with large national banks.  They are hiring certified financial planners.  They are paying high management fees, so there is no expectation of anything “free”.  They are asking good questions and being reassured that their financial advisor is looking out for their best interest.  But they are being swindled nonetheless – because they don’t know about the hidden incentives, because they are unable to differentiate good investments from bad ones, and because they are being reassured by their advisor about how well they are doing compared to the market, even if the opposite is really true.

These are professional con men that are swindling millions of seniors, every day, all over the country -- decimating their life savings in their final years. 

I know, because I have seen it happen.  And I am mad.  Steaming mad.”

 

This writer is not the only one that is steaming mad. So are millions of people - retirees that don’t have the luxury of ‘making it back’ and workers that aren’t getting paid enough to leave unnecessary money ‘on the table’ of brokers and advisors whose best interests are institutionally and legislatively their own. Heeding the warning in here, and separating one’s bank deposits from the bank’s asset management arm that views them as fee-fodder, would be one way to protect against the damage that this regulatory fusion of bank practices causes.