| The term red pill and its opposite, blue pill, are pop culture terms that have become a common symbol for the choice between the blissful ignorance of illusion (blue) and embracing the sometimes painful truth of reality (red). |
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Banks Seen Dangerous Defying Obama’s Too-Big-to-Fail Move
Two years after President Barack Obama vowed to eliminate the danger of financial institutions becoming “too big to fail,” the nation’s largest banks are bigger than they were before the nation’s credit markets seized up and required unprecedented bailouts by the government.
Five banks — JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC), Citigroup Inc., Wells Fargo & Co. (WFC), and Goldman Sachs Group Inc. — held $8.5 trillion in assets at the end of 2011, equal to 56 percent of the U.S. economy, according to central bankers at the Federal Reserve.
Five years earlier, before the financial crisis, the largest banks’ assets amounted to 43 percent of U.S. output. The Big Five today are about twice as large as they were a decade ago relative to the economy, sparking concern that trouble at a major bank would rock the financial system and force the government to step in as it did in 2008 with the Fed-assisted rescue of Bear Stearns Cos. by JPMorgan and with Citigroup and Bank of America after the Lehman Brothers bankruptcy, the largest in U.S. history.
“Market participants believe that nothing has changed, that too-big-to-fail is fully intact,” said Gary Stern, former president of the Federal Reserve Bank of Minneapolis.
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Delaying Foreclosure: 62 Years to Repossess New York Homes at Current Pace
More troubling data on real estate and foreclosures as a whole from the NYT:
In New York State, it would take lenders 62 years at their current pace, the longest time frame in the nation, to repossess the 213,000 houses now in severe default or foreclosure, according to calculations by LPS Applied Analytics, a prominent real estate data firm.
Clearing the pipeline in New Jersey, which like New York handles foreclosures through the courts, would take 49 years. In Florida, Massachusetts and Illinois, it would take a decade.
In the 27 states where the courts play no role in foreclosures, the pace is much more brisk — three years in California, two years in Nevada and Colorado — but the dynamic is the same: the foreclosure system is bogged down by the volume of cases, borrowers are fighting to keep their houses and many lenders seem to be in no hurry to add repossessed houses to their books.
“If you were in foreclosure four years ago, you were biting your nails, asking yourself, ‘When is the sheriff going to show up and put me on the street?’ ” said Herb Blecher, an LPS senior vice president. “Now you’re probably not losing any sleep.”
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IMF: Gold Is Scarce “Safe Asset” And “Growing Shortage of Safe Assets”
IMF: Gold Is Scarce “Safe Asset” And “Growing Shortage of Safe Assets”
Gold’s London AM fix this morning was USD 1,655.50, EUR 1,261.33, and GBP 1,039.04 per ounce. Yesterday’s AM fix was USD 1,654.00, EUR 1,261.63 and GBP 1,040.25 per ounce.
Silver is trading at $31.56/oz, €24.01/oz and £19.78/oz. Platinum is trading at $1,583.75/oz, palladium at $637.50/oz and rhodium at $1,350/oz.
Cross Currency Table – (Bloomberg)
Gold fell $0.90 or 0.05% in New York yesterday and closed at $1,658.10/oz. Gold has been trading sideways in Asian trading and remains in a tight range in Europe this morning near $1,656.07/oz.
Gold remains supported this morning as the ECB signalled that it would intervene in the debt markets on worries about Spain and the risk of contagion in the Eurozone. ECB board member Benoit Coeure said “the European Central Bank still has its bond-buying programme as an option”.
Investors are also still concerned about other peripheral Eurozone economies like Italy and how they might affect the core Eurozone nations. Italy saw its 1 year borrowing costs rise for the first time since November during its sale of short term bills yesterday, ahead of a 3 year bond auction later today.
The number two official at the US Fed, Yellen, said overnight that due to high unemployment facing the economy, the Fed has left the door open to further Fed action including QE.
Further QE and the continuation of ultra loose monetary policies will be positive for gold.
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Breakdown of the Paper Money Economy
Listen Now:
Richard Duncan explains why the global economy is teetering on the brink of falling into a deep and protracted depression, and how we can restore stability.
When the United States stopped backing dollars with gold in 1968, the nature of money changed. All previous constraints on money and credit creation were removed and a new economic paradigm took shape. Economic growth ceased to be driven by capital accumulation and investment as it had been since before the Industrial Revolution. Instead, credit creation and consumption began to drive the economic dynamic. In The New Depression: The Breakdown of the Paper Money Economy, Richard Duncan introduces an analytical framework, The Quantity Theory of Credit, that explains all aspects of the calamity now unfolding: its causes, the rationale for the government’s policy response to the crisis, what is likely to happen next, and how those developments will affect asset prices and investment portfolios.
In his previous book, The Dollar Crisis (2003), Duncan explained why a severe global economic crisis was inevitable given the flaws in the post-Bretton Woods international monetary system, and now he’s back to explain what’s next. The economic system that emerged following… Continue reading
Ben Graham’s Curse On Gold
It seems that the mainstream investment community only takes a break from ignoring gold to berate it: one of gold’s most outspoken critics, uber-investor Warren Buffett, did so recently in his latest shareholder letter. The indictments were familiar; gold is an inanimate object “incapable of producing anything,” so any investor holding it instead of stocks is acting out of irrational fear.
How can it be that Buffett, perhaps the most successful (and definitely the most well-known) investor of our time, believes that gold has no place in an intelligently allocated investment portfolio?
Perhaps it has something to do with his mentor, Benjamin Graham.
Graham, author of Security Analysis (1934) and The Intelligent Investor (1949), is correctly respected as one of history’s most knowledgeable investors. Over a career spanning 1915 to 1956, he refined his investment theories, in time becoming known as the father of value investing. Much of modern portfolio theory is based upon Graham’s work.
According to Graham, while no one can tell the future, there are periods when the valuations of stocks and bonds would deviate from fair value by becoming excessively over- or undervalued. To enhance returns and reduce risk, investors should alter their portfolio allocations accordingly. A quick look at a long-term chart supports Graham’s theory clearly shows periods when one asset class offered a better value than the other:
Interest Rates 101
An interest rate is the cost of borrowing money [source: Investopedia.com]. A borrower pays interest for the ability to spend money now, rather than wait until he’s saved the same amount [source: New York Fed]. Interest rates are expressed as an annual percentage of the total amount borrowed, also known as the principle [source: Investorwords.com]. For example, if you borrow $100 at an annual interest rate of five percent, at the end of the year you’ll owe $105.
Interest rates aren’t just random punishments for borrowing money. The interest a lender receives is his compensation for taking a risk [source: Investopedia.com]. With every loan, there’s a risk that the borrower won’t be able to pay it back. The higher the risk that the borrower will default (fail to repay the loan) is, the higher the interest rate. That’s why maintaining a good credit score will help lower the interest rates offered to you by lenders.
The nice thing is that interest rates work both ways. Banks, governments and other large financial institutions need cash, too, and they’re willing to pay for it. If you put money into a savings account at a bank, the bank will pay you interest for the temporary use of that money. Governments sell bonds and other securities for the same reason. In this case, you’re the lender, and the interest rate is your compensation for temporarily giving up the ability to spend your cash. Unfortunately, savings accounts and government-issued bonds pay relatively low interest rates because the risk of defaulting is close to zero [source: Investopedia.com].
A borrower’s credit score is only one of the risk factors that affect interest rates. For example, interest rates for unsecured credit will always be higher than secured credit [source: Investopedia.com]. Secured credit is backed by collateral. A mortgage is the classic example of secured credit, because if the borrower defaults on the loan, the bank can always take the house. Credit cards are unsecured credit, because there’s no collateral backing the loan, only the cardholder’s credit score. Mortgage interest rates are typically much lower than credit card interest rates because they’re less risky for the lender.
Long-term loans also carry higher interest rates than short-term loans, because the more time a borrower has to pay back a loan, the more time there is for things to go rotten financially, causing the borrower to default [source: Investopedia.com].
Another factor that makes long-term loans less attractive to lenders — and therefore raises long-term interest rates — is inflation [source: Investopedia.com]. In a healthy economy, inflation almost always rises, meaning the same dollar amount today is worth less five years from now. Lenders know that the longer it takes the borrower to pay back a loan, the less that money is going to be worth.
That’s why interest rates are actually calculated as two different values: the nominal rate and the real rate. The nominal rate is the interest rate set by the lending institution [source: Investorwords.com]. The real rate is the nominal rate minus the rate of inflation [source: Investorwords.com]. For example, if you take out a mortgage with a nominal interest rate of 10 percent, but the annual rate of inflation is four percent, then the bank is only really collecting six percent on the loan.
But perhaps the most important, and certainly most talked about interest rates are those set by the Federal Reserve, which we’ll examine next.
