Fed Strategy The Wrong Way For Growth

An excerpt from Bob Chapman's weekly publication.

October 27 2010: Financial follies continue, more bank closures this year than last, pension liabilities exceed revenues, continued troubles in the economy, no real interventions in currency market, PIMCO predictions.

As the Friday Night Financial Follies continues regulators on Friday shut down two small banks in Florida and two in Georgia, lifting to 136 the number of U.S. banks that have fallen this year as soured loans have mounted and the economy has sputtered.

With 136 closures nationwide so far this year, the pace of bank failures exceeds that of 2009, which was already a brisk year for shutdowns with 140. By this time last year, regulators had closed 106 banks.

The pace has accelerated as banks' losses mount on loans made for commercial property and development. Many companies have shut down in the recession, vacating shopping malls and office buildings financed by the loans. That has brought delinquent loan payments and defaults by commercial developers.

The 2009 total of bank failures was the highest annual tally since 1992, at the height of the savings and loan crisis. The 2009 failures cost the insurance fund more than $30 billion. Twenty-five banks failed in 2008, the year the financial crisis struck with force; only three succumbed in 2007.

The growing bank failures have sapped billions of dollars out of the deposit insurance fund. It fell into the red last year, and its deficit stood at $15.2 billion as of June 30.

The number of banks on the FDIC's confidential "problem" list jumped to 829 in the second quarter from 775 three months earlier, even as the industry as a whole had its best quarter since 2007, making $21.6 billion in net income. Banks with more than $10 billion in assets only 1.3 percent of the industry accounted for $19.9 billion of the total earnings.

The FDIC expects the cost of resolving failed banks to total around $52 billion from 2010 through 2014.

It was about three months ago that we took a lonely stand in predicting QE2. We had seen the strong activity of the Fed in the repo market since June and attempts by bankers to lend to better quality rated small and medium sized businesses. The Fed stoked a sliding economy and the banks had only mixed success.

Since July much has happened. Gold, silver and commodities have risen as has the dollar, the market and bonds. We now purportedly have a currency war that will lead to tariffs on goods and services and we have been beset with Foreclosuregate.

In Foreclosuregate the federal government is trying to cover up the damage and put it off until after the election. The states’ attorney generals’ have different ideas. Even if mortgages were traded electronically the law demands that there be a paper trail. The initial events in this discovery process has already unveiled that banks used the same mortgages to fill different loan packages. They were sold multiple times, which, of course, is fraud. Furthermore the MERS system is unlawful. As a result Bank of America has demanded the FDIC pay them for faulty or bad mortgages. Evidently the practice of multiple mortgage use was widespread. The entire system is rife with fraud, due to lack of lawful, proper, legal documentation. That had led banks to arrange mortgages to totally unqualified borrowers just to be able to securitize and sell those AAA rated mortgages. The banks made major amounts of money and the Federal Reserve arranged for the taxpayer to pay the bill. The banks carried fractional banking to a new level in their deliberate fraud. In fact, there is even the possibility that the mortgages were never really securitized. There probably never was any paper work and what there was perpetuated fraud. In addition there is also the possibility that LPS, a foreclosure-outsourcing firm, fabricated documents and committed forgery as well.

Bankers made outsized profits via fraud. The question now is, who is going to jail? Government will jail the little guys as always and the big fish will swim away. Let’s hope this time it is different.

Even the NY Fed wants to financially pursue Bank of America and Fannie Mae and Freddie Mac want to pursue Wells Fargo for burying them with toxic waste known as CDOs, ABS and MBS. If many mortgages are forced back to the creators, that will force the banks into insolvency or another public bailout, we will call TARP2. This kind of action will send the public into spasms and it could lead to major demonstrations. They are sick and tired of the financial world being bailed out and the public getting nothing.

This scandal comes as residential and commercial real estte keeps falling in value, putting many more banks on the edge of failure. That is borne out by Gary Shilling who believes housing prices will fall another 20% and the number of underwater mortgages will increase from 23% to 40%, or that half of Americans will deliberately default. We, as has Mr. Shilling, been uninvited guests predicting a major fall in housing since June of 2005.

The propaganda, lies and disinformation the American public has been subjected to, is without precedent and they are finally listening. Wall Street, banking, insurance and their government are the enemy. The amount of disinformation being presented to the average American goes on 24/7, never ceasing in magnitude by a totally controlled major media. If it wasn’t for talk radio and the Internet the public would already be enslaved totally. Needless to say, today in Orwellian fashion people such as us are treated as terrorists, because we deal in the truth and government does not like that, because it exposes them for what they are, criminals. In the end the truth will win out and they will pay for their crimes.

The minions of the powers behind government were successful in passing a health care bill, which will begin in two years. Those earning more than $200,000 as a single or $250,000 married will pay an extra 0.9% in FICA taxes for Social Security. After that level you will pay 3.4% on your income. Within 20 years most taxpayers will pay these rates due to inflation.

The AMT is not indexed for inflation, thus the alternative minimum tax will continue as a heavy burden.

Most people do not realize, unless they are victims that the first 50% and then 85% of Social Security benefits are subject to taxation. In 2000, just 22% were above that level. It is now 39%. In 50 years, 85% will be taxed. Where we ask is the tax revolt? By that time the age to collect SS will be 70. By that time taxes on the wealthy will rise from 39.6% to 36% for the top two brackets. In just ten years those in the 15% bracket will graduate into the 25% bracket. The 28% group will be in the 36% bracket. Is it any wonder there is an exodus of citizens from America to foreign places with more forgiving tax rates? Incidentally, they won’t be going to Europe where rates are 70%, if you include the VAT, the value added tax. That legislation holds, health care reform, 16-tax increase for those of you who were not paying attention.

The Fed has informed us that part of the way to salvage a badly damaged financial system is to allow more inflation. What they do not tell you is that barriers by countries to keep dollars out of their economies and currency wars are going to impose higher inflation levels than in the past. It means the Fed won’t have the luxury of exporting inflation.

That is something the Fed does not want to discuss, as they prepare to inject more than $2 trillion additional into the economy in this coming year. Actually that exercise began this past June. You were not informed, because you did not have a need to know. It is part of our secret government.

For the curious, most people, even on Wall Street don’t realize that as a result of the Merrill Lynch-Bank of America merger, the bank owns 34% of Black Rock, which is worth $11.5 billion. Black Rock is also the owner of 5.35% of BofA shares, worth $6.6 billion. This creates a conflict of interest. This pits them both against PIMCO and the NY Fed in their MBS differences.

The Dow gained 0.6%, S&P rose 0.6%, the Russell 2000 was unchanged and the Nasdaq 100 added 0.3%. Banks rose 1.7%, broker/dealers 2.3%, cyclicals 0.5% and transports rose 1.3%. Consumers gained 0.7%; high tech gained 1%; semis were unchanged; Internets rose 1.9% and biotechs 2.4%. Gold bullion fell $40, the HUI gold index fell 4.3% and the USDX gained 0.5% to 77.36.

The 2-year T-bill fell 1 bps to 0.35%; the 10-year T-note was unchanged at 2.56% and the 10year German bund rose 10 bps to 2.47%.

The Freddie Mac 30-year fixed rate mortgage rates increased 2 bps to 4.21%, the 15’s rose 2 bps to 3.64%; one year ARMs sank 13 bps to 3.30% and the 30-year fixed jumbos rose 1 bps to 5.24%.

Fed credit fell $9.4 billion and Fed foreign holdings of Treasury and Agency debt jumped $14.1 billion to a new record $3.281. Custody holdings for foreign central banks increased $326 billion YTD, or 13.7% annualized. Year-on-year it is up 13.6%.

M2 narrow money supply increased $3.9 billion to $8.757 trillion.

Total money market fund assets fell $17 billion to $2.782 trillion. Year-to-date assets are off $512 billion.

We have seen the Fed subtly inject money and credit into the system since early June. That is five months of deception. Easing is obviously here to stay. Mr. Geithner requested certain caps on trade surpluses by not allowing them in excess of 4% of FGDP, which was shunted aside. This is a request for a soviet style command economy. Just another wacky idea. This means the only avenue left is an increase of $8 trillion in QE2. A deliberate reduction in the value of the dollar, zero interest rates, double-digit fiscal deficits and inflation and massive monetization of fiscal debt. That means real trouble for dollar holders. It is no wonder that countries are already erecting barriers to dollar investment in their countries by taxing incoming dollar investments. There has been little productive investment to rebalance a maladjusted economy. How can there ever be rebalancing without tariffs on goods and services. This is what free trade, globalization, offshoring and outsourcing have brought us. Yes, the US is a basket case when we are looking at a possible $500 billion current account deficit this year. This is the result of policies that has all the earmarks of a banana republic. That result has been followed to enrich transnational conglomerates. How can you compete when you have de-industrialized and put 8.5 million people out of work?

The US wants foreign currencies to appreciate versus the dollar and that is not going to happen, thus, the dollar will be brought down to 40 to 55 on the USDX where it currently reflects 77.00.

As this transpires funds will continue to flow into gold, silver and commodities. This massive liquidity will not be welcome in foreign countries. The continual monetization will be frightening, but in this round a good part of the inflation will stay in the US leading to much higher inflation as foreign barriers are erected. Hold on to your seatbelts it is going to be a wild ride.

Bloomberg (John Gittelsohn and Jody Shenn): “Shoddy mortgage lending has led bankers into a two-front war, pitting them against U.S. homeowners challenging the right to foreclose and mortgage-bond investors demanding refunds that could approach $200 billion. While federal regulators and state attorneys general have focused on flawed foreclosures, a bigger threat may be the cost to buy back faulty loans that banks bundled into securities. JPMorgan Chase & Co., Bank of America Corp., Wells Fargo & Co. and Citigroup Inc. have set aside just $10 billion in reserves to cover future buybacks.â€