Tag Archives: Banks

The Great Unwind II, by Alasdair Macleod

To stay solvent banks are going to have to dramatically curtail lending. Shrinking credit and central bank debt monetization will drive the world into an inflationary depression. From Alasdair Macleod at goldmoney.com:

With price inflation rising out of control and interest rates rising strongly, the trading environment for commercial banks has fundamentally changed. With bad debts looming and bond prices in entrenched downtrends, procrastination is now the enemy of bankers.

We are at the beginning of The Great Unwind, and this article elaborates on my first article for Goldmoney on the subject published here

The imperative for bankers to respond to these conditions overrides all other matters if their businesses are to survive these changed conditions. We are entering a cyclical downdraft of the bank credit cycle which promises to be cataclysmic. And the monetary policy planners at the central banks can do nothing to stop it.

After outlining the scale of the problems faced by each global systemically important bank, this article looks at the future for the $600 trillion derivatives mountain. It was born out of the long-term decline in interest rates from the mid-eighties, which ended last year. It is almost entirely distributed through banks and shadow banks.

The question to address is, what is the future for the derivative mountain, now that the long-term trend for falling interest rates is over? And what are the economic consequences?

If it’s you in the hot seat…

Imagine, for a moment, that you are the CEO of a commercial bank involved in lending to businesses and with profit centres acting in a range of financial activities. As CEO, you are answerable to the board of directors for the bank’s performance, and ultimately the bank’s shareholders for maintaining and advancing the value of their shares. 

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Markets Are Expecting the Federal Reserve to Save Them – It’s Not Going to Happen, by Brandon Smith

The Federal Reserve is intentionally trying to destroy the economy and take down financial markets. From Brandon Smith at birchgold.com:

Markets Are Expecting the Federal Reserve to Save Them and It Is Not Going to Happen

Image © Steeve Roche

I have said it many times in the past but I’ll say it here again: Stock markets are a trailing indicator of economic health, not a leading indicator. Rising stock prices are not a signal of future economic stability. When stocks fall, it’s usually after years of declines in other sectors of the financial system.

Collapsing stocks are not the “cause” of an economic crisis, they are just the delayed symptom of a crisis that was already there.

Anyone who started investing after the crash of 2008 probably has no understanding of how markets are supposed to behave, and what they represent to the rest of the economy. They’ve never seen markets operating without interference and stock prices moving freely. Central bank meddling, which started as a “last ditch effort” to save the global financial system at any price has now become business-as-usual. Worldwide, stocks surge when investment banks anticipate Federal Reserve easing, the so-called and often-forecast “pivot” from its current monetary-tightening program back to the good old days of endless free money. And stocks plunge every time a member of the Federal Open Market Committee (FOMC) announces that inflation is still too high, and the Fed has to keep fighting it.

Most market participants no longer have any understanding of fundamentals. Robinhood day-traders and Redditors don’t see stocks as a fractional claim on the future profits of a business – they think they’re just buying poker chips in the great Stock Market Casino where everybody always wins.

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David Stockman on the Banking Ponzi Scheme That’s Savaging Depositors

Banks are not paying enough interest to compensate good old-fashioned savers for the depreciation of their dollars due to inflation. From David Stockman at internationalman.com:

Banking Ponzi Scheme

The toxic effects of the Fed’s relentless interest rate repression are many, but among the worst has been the absolute savaging of bank depositors.

Interest rates on 12-month CDs (under $100,000) dropped below the inflation rate in October 2009 and have been pinned there ever since.

There is no other word for this than “expropriation” — an unconstitutional taking of property from tens of millions of households that needed to keep their funds liquid and didn’t wish to roll the dice in the junk bond market or stocks.

Worse still, the resulting vast transfer of income from depositors to banks has resulted in an egregious, artificial ballooning of bank profits and stock prices.

For instance, the combined market cap of the top six US banking institution — JP Morgan, Bank of America, Citigroup, Wells Fargo, Morgan Stanley and Goldman Sachs — has risen from $200 billion at the bottom of the financial crisis during the winter of 2008-2009, where it reflected their true value absent government bailouts, to $1.5 trillion recently.

That 7.5X gain, which was 100% orchestrated by the Fed, is an unspeakable gift to the wealthy who own most of the stocks and especially to top bank executives who have cashed-in on vastly appreciated options.

Needless to say, this massive bubble in banks and other financial stocks is unsustainable. When the Fed is finally forced to shut down its printing presses, the bank stocks will be among the first to dive into the abyss.

While this might represent condign justice from a policy and equitable point of view, the extent of the harm to everyday Americans cannot be gainsaid.

That’s because Wall Street is going for one more bite at the apple, claiming that the currently accelerating rate of inflation is good for bank stocks.

Consensus stock price forecasts for JPMorgan are up 20% by 2023 and for Goldman Sachs by 70%.

Needless to say, this is just another 11th hour lure from big money speculators looking to unload vastly overvalued stocks on unwary retail investors.

Accelerating inflation supposedly portends higher growth and loan demand, but that’s a complete humbug because what we actually see in the market is stagflation. And that will cap loan demand even as it squeezes net interest margins, causing bank earnings to fall big time.

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One weird sign of trouble in the banking sector, by Simon Black

Banks have suddenly acquired heaps of bad loans as coronavirus restrictions have cost millions the ability to repay their loans. Consequently, banks are not making many new loans. From Simon Black at sovereignman.com:

It was only a few generations ago that most people spent their entire lives within a few miles of where they were born.

They grew up, lived, worked, and retired, all in the same place. And that was normal.

Travel and relocation didn’t really become commonplace until after World War II. But even then, the most common reason people moved was because of a job.

And it has remained that way for decades; people tend to choose where they live because it’s close to the place that they work.

But honestly that’s a completely outdated model, and I’ve been writing about this for years:

It’s the 21st century. Whether they realize it or not, countless people have the flexibility to live wherever they want (within reason) while still being able to do their jobs.

Few people ever thought about this… until Covid. And then suddenly tens of millions of people were forced to work from home.

I have no doubt a lot of people hated every minute of it. Some people are wired that way– they need a refuge… a daily escape, to be around other people in an environment outside of the home.

But others absolutely loved it. No more commute, no traffic, more time with the family.

One of my attorneys has an office in midtown Manhattan, but he lives in Connecticut. He told me that working from home saved him more than 2 hours a day.

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Farewell to Paper Money? by Jeff Thomas

Governments want money to be all electric, so that they can keep track of it and what people do with it, and so they can keep it in banks should the banking system run into trouble (they call it a bail-in). From Jeff Thomas at internationalman.com:

A decade or more ago, I began to discuss with associates the possibility of governments and banks colluding to eliminate physical cash. Back then, the idea struck most everyone as poppycock, that governments could never get away with it.

I didn’t write on the subject until 2015, when several countries had begun to limit the amount of money a depositor could extract from his bank account. At that point, the prospect that central banks might conceivably eliminate cash was looking less like an alarmist fantasy, and it became possible to write on the nascent issue.

In a nutshell, today, in most of the world’s most prominent countries, the people who control banking are the same people who pull the strings in government. A cashless system therefore seemed to me to be a natural, as it dramatically increased both profit and power for both banking and government – an opportunity that can’t be passed up.

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About Trump, by Sylvain LaForest

Is there method to President Trump’s madness? That’s a question people have been asking for the last three years. Sylvain LaForest claims there is. From LaForest at orientalreview.org:

The timing is right for everyone to understand what Donald Trump is doing, and try to decrypt the ambiguity of how he is is doing it. The controversial President has a much clearer agenda than anyone can imagine on both foreign policy and internal affairs, but since he has to stay in power or even stay alive to achieve his objectives, his strategy is so refined and subtle that next to no one can see it. His overall objective is so ambitious that he has to follow random elliptic courses to get from point A to point B, using patterns that throw people off on their comprehension of the man. That includes most independent journalists and so-called alternative analysts, as much as Western mainstream fake-news publishers and a large majority of the population.

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Fed Pays Banks $30 Billion on “Excess Reserves” for 2017, by Wolf Richter

This should disabuse any remaining innocents of the quaint notion that the Federal Reserve isn’t a tool of the banks. From Wolf Richter at wolfstreet.com:

At taxpayer expense: easiest, risk-free, sit-on-your-ass profit ever.

The Federal Reserve’s income from operations in 2017 dropped by $11.7 billion to $80.7 billion, the Fed announcedtoday. Its $4.45-trillion of assets – including $2.45 trillion of US Treasury securities and $1.76 trillion of mortgage-backed securities that it acquired during years of QE – produce a lot of interest income.

How much interest income? $113.6 billion.

It also made $1.9 billion in foreign currency gains, resulting “from the daily revaluation of foreign currency denominated investments at current exchange rates.”

For a total income of about $115.5 billion.

Those are just “estimates,” the Fed said. Final “audited” results of the Federal Reserve Banks are due in March. This “audit” is of course the annual financial audit executed by KPMG that the Fed hires to do this. It’s not the kind of audit that some members in Congress have been clamoring for – an audit that would try to find out what actually is going on at the Fed. No, this is just a financial audit.

As the Fed points out in its 2016 audited “Combined Financial Statements,” the audit attempts to make sure that the accounting is in conformity with the accounting principles in the Financial Accounting Manual for Federal Reserve Banks.Given that the Fed prints its own money to invest or manipulate markets with – which makes for some crazy accounting issues – the Generally Accepted Accounting Principles (GAAP) that apply to US businesses to do not apply to the Fed.

This annual audit by KPMG reveals nothing except that the Fed’s accounting is in conformity with the Fed’s own accounting manual.

Here is what the banks Get:

The Fed pays the banks interest on their “Required Reserves” and on their “Excess Reserves” at the Fed. Excess Reserves are the biggie: As a result of QE, they jumped from $1.7 billion in July 2008, to $2.7 trillion at the peak in September 2014. They’ve since dwindled, if that’s the right word, to $2.2 trillion:

To continue reading: Fed Pays Banks $30 Billion on “Excess Reserves” for 2017

Big Banks Are All Over Blockchain, by Don Quijones

The blockchain “revolution” is going mainstream. From Don Quijones at wolfstreet.com:

To process derivatives, currency trades, transactions, etc. Just don’t call it cryptocurrency. It’s a “digital currency.”

As a general rule, most bankers disparage cryptocurrencies, like Bitcoin, as anything but purely speculative instruments. But they don’t disparage blockchain, the technology that underpins cryptocurrencies. On the contrary. They’re pouring money into developing their own “digital currencies,” as they call them. Just don’t call them “cryptocurrencies.”

UBS, BNY Mellon, Deutsche Bank, Santander, the market operator ICAP, and the startup Clearmatics formed an alliance in 2016 to explore the use of digital currency between financial institutions and central banks, using blockchain technology — the open-source software that underpins cryptocurrencies.

The ultimate goal of the project is to create a digital currency known as Utility Settlement Coin (USC), which will facilitate payment and settlement for institutional financial markets. As the FT reported in October, commercial banks are growing tired of waiting for central bankers to take the lead in fending off the challenge that standalone cryptocurrencies such as bitcoin could pose to their control of monetary policy, and are pressing on with their own pet projects.

According to Deutsche Bank’s website, USC is “an asset-backed digital cash instrument implemented on distributed ledger technology for use within global institutional financial markets.” It consists of a “series of cash assets, with a version for each of the major currencies (USD, EUR, GBP, CHF, etc.) and is convertible at parity with a bank deposit in the corresponding currency.”

It’s easy to see the attraction blockchain holds for big banks like Deutsche, UBS and Santander: Combining shared databases and cryptography, the technology offers multiple parties simultaneous access to a constantly updated digital ledger that cannot be altered. With it, banks could offer a safer, faster, cheaper, more transparent service to their customers, while doing away with the need for a central operator.

Settlements could be executed almost instantaneously on a bank-by-bank basis rather than having to be netted at the end of each working day by the respective central bank. The subsequent cost savings could be huge.

 To continue reading: Big Banks Are All Over Blockchain

Is the Global Taxman Coming? by Don Quijones

Will it be before or after cash is eliminated that a global taxing authority is established? From Don Quijones at wolfstreet.com:

But who are they really going after?

Credit Suisse is once again under international investigation for allegedly helping its clients evade the prying eyes of national tax authorities. This comes after the bank was fined $2.6 billion by the U.S. government in 2014 for helping Americans evade taxes.

Helping high net worth private clients and corporations evade taxes, and then getting caught is not unique to Credit Suisse. Fellow Swiss megabank UBS and UK giant HSBC were fined hundreds of millions of dollars for their troubles.

The banks are not just helping their clients evade taxes. In a report titled Opening the Vaults, UK-based charity Oxfam International revealed this week that in 2015, Europe’s 20 largest banks registered over a quarter of their profits in tax havens – well out of proportion to the level of real economic activity that occurs there. Once again, Luxembourg was a top destination for funds, while in Ireland the same banks recorded profits that were 76% higher than the global average in 2015. Only the Cayman Islands was found to have a higher profitability rate.

None of this should come as a surprise. If any organization knows how to bend the rules and use and abuse the tools and levers of global finance to minimize a company or individual’s tax “footprint,” it’s today’s generation of global banks. And no matter how many fines they are made to pay, they’re not going to change their ways.

And that is bad news for today’s governments, which need increasing amounts of money to meet their obligations and service their debts, as well as rescue the banks every time they get in trouble. It is also bad news for regular taxpayers since they will have to make up the difference, until that’s no longer possible.

To continue reading: Is the Global Taxman Coming?

 

Italy at the Grim Edge of a Global Problem, by Don Quijones

You may be tired of hearing about Italy, but it’s only going to get worse. From Don Quijones at wolfstreet.com:

This trend is not your friend.

To be young, gifted, educated and Italian is no guarantee of financial security these days. As a new report by the Bruno Visentini Foundation shows, the average 20-year-old will have 18 years to wait before living independently — meaning, among other things, having a home, a steady income, and the ability to support a family. That’s almost twice as long as it took Italians who turned 20 in 2004.

A Worsening Trend

Eurostat statistics in October 2016 showed that less than a third of under-35s in Italy had left their parental home, a figure 20 percentage points higher than the European average. The trend is expected to worsen as the economy continues to struggle. Researchers said that for Italians who turn 20 in 2030, it will take an average of 28 years to be able to live independently. In other words, many of Italy’s children today won’t have “grown up” until they’re nearing their 50s.

That raises an obvious question: if Italy’s future generation of workers are expected to struggle to support themselves and their children until they’re well into their forties, how will they possibly be able to support the burgeoning ranks of baby boomers reaching retirement age (a staggeringly low 58 for men and 53 for women), let alone service the over €2 trillion of public debt the Italian government has accumulated (and which doesn’t include the untold billions it hopes to splash out on saving the banks)?

The trend could also have major implications for Italy’s huge stock of non-performing loans, which, unless resolved soon, threatens to overwhelm the country’s banking system. If most young Italians are not financially independent, who will buy the foreclosed homes and other properties that will flood the market once the soured loans and mortgages are finally removed from banks’ balance sheets?

To continue reading: Italy at the Grim Edge of a Global Problem