The bankruptcy of business-loan giant CIT made headlines last weekend, but the story seems to have died all too quickly, considering its importance. Women will recognize this soon enough, since CIT provided financing to 60 percent of the apparel industry. All told, CIT was lending to 2000 firms that supplied merchandise to more than 300,000 stores. If you think vacant storefronts are a blight now, wait till you see how the malls, big-box stores and strip centers look in another year. One thing’s for sure, a CIT in reorganization will not be doing nearly as much lending to a cash-strapped retail sector.
With CIT seriously hobble, our friend Rich Cash, formerly a fund manager with Merrill Lynch, has provided a breezy, up-to-the-minute view of the economic landscape. We proffer it below, with many fascinating links, for your enjoyment.
Will Earth Stand Still… Again?
Who missed the 1943 Academy Award nominee tear-fest set in Depression Era Yorkshire, starring young Elizabeth Taylor and Roddy McDowell? Who did not feel at least a twinge as 1951/1989 galactic ambassadors Michael Rennie/Keanu Reeves were shot dead warning Washington that the earth would be terminated if it did not stop building atomic weapons, destroying the environment or fighting in space? Who saw Michael Jackson’s eloquent posthumous plea for loving each other and saving the world with peace?
Klaatu barada nikto…Et tu Brute?…This Is It!
Our collapsing pyramid of Ponzi debts came home, and Earth’s financial systems may be about to stand still. The second shoe from Panic Fall 2008 perhaps dropped this week, after long heroic useless measures to save $78B CIT, choking on its own debt. CIT was a major financier of Dunkin Donuts and payrolls for thousands of other small businesses providing low-wage jobs in the service economy. The end of dollars to donuts may not be a good sign.
Not So Manageable
Epic Halloween Thriller graveyard collapse of the debt-bubble mania may be coming soon to a financial theatre near U.S. CIT’s implosion could sweep all global leveraged debtors into the whirlpool while drowning in IOUs, selling assets and scrambling for cash. The official line is that CIT is manageable. Tell that to the companies and creditors affected.
A prepackaged CIT bankruptcy perhaps did not help Goldman Sachs, banks, governments, hedge and mutual funds holding CIT paper, 300,000 stores, or underemployed, consumer-taxpayers tapped out by TARP. $2.33 Billion in TARP bailout money may be long gone with bad manufacturing credit, mortgages, student loans and retail factoring as the global economy collapses from too much debt.
CIT’s stress-refinancing via bankruptcy could close down a lot of banks, businesses, consumers and even governments holding CIT paper for manufacturing, education and consumer goods, further contracting credit, economy, jobs and taxes. CIT more than AIG may teach the first generation in three to save rather than borrow.
Pimco Takes a Hit
Aflac and Pimco were the largest CIT bondholders in the prepackaged bankruptcy. The bankruptcy declared last weekend was similar to GM in wiping out CIT equity shareholders who rode the rollercoaster of hope down to an inevitable destination of destruction. Only the $328 Billion Washington Mutual failure was bigger than CIT. JPM bought $328 Billion WM for just $1.9 Billion, with Fed taxpayer TARP financing. That was less than a penny on the dollar. A stunned WM is suing JPM for $13 Billion.
The FDIC bailed out on CIT’s rescue last summer. CIT was admittedly beyond their ability to bail out. Publicized reports that the feds decided CIT would not materially impact anybody may be false bravado designed for calm assurance. It seems Europeans had CDO Collateralized Debt Obligations on CIT in size, amounting to two-thirds of European CDOs. So did American regional banks. CIT credit market failures could take Europe and American banks down and out again. This could lead to an emergency scramble for dollars with unwinding of the short dollar carry trade at internet speeds.
Creditanstalt Trigger
Picture $50 trillion of foreign exchange suddenly trying to crowd into the dollar. That could make more stress for the biggest OTC derivative-writing corporations that once called themselves commercial banks. When the debtor derivative dust falls out and settles many years from now, it may become clear CIT or GS was the Creditanstalt trigger of the Greatest Depression. Creditanstalt was bailed out by the Rothschilds but did not stop the inevitable Winter Season of the Economy.
Meanwhile, the USA is only the 20th most indebted nation, with enough currency to buy in size for some time. Euro nation and Hong Kong currency economies are actually more indebted than the dollar. The neo-Keynesian debt disease was more contagious and fatal than Swine Flu so far. Ireland, Switzerland and UK head the global debtor-deflator list, with Foreign Debts 5-12 times their GDPs.
Surplus nations Brazil, China, India, Japan and Russia do not have enough currency market size to absorb up to $50 Trillion of flight capital. Nor does gold. All the gold producers in the world combined are less than one-third the size of Exxon Mobil. The world has $50 Trillion in Forex, $4 Trillion in cash and five billion ounces of gold.
Cash/Gold Relationship
The cash/gold relationship overpriced gold around $1000 when it might be closer to $800 an ounce. As derivatives, $50 Trillion of Forex could disappear with deflationary impact before driving gold much higher. $250 Billion of IMF International Monetary Fund SDR Special Drawing Rights may still be Forex fantasy. So dollars may once more become the currency of last resort. We are saving our dollars for a rainy day.
The last shall be first. The world has $53 Trillion of debts that could drive gold to $10,600 or default first, wiping out equity everywhere.
Big Five bank failures in America could eventually become big enough to take out and down all linked global financial institutions and markets as well as global economies. That was the rationale of Treasury Secretaries Paulson and Geithner for committing trillions of taxpayer dollars and Federal Reserve Credit to bail out banks and not consumers. This rationale was restated on Meet The Press this past weekend with slightly less conviction.
A Hollow Bailout
Who really believes the +3.5% Third Quarter 2009 GDP will long replace a Depression year of GDP down –15.2%? Thanks to Big Bank Boyz buying Congress and the President, there were no Fed Glass-Steagall SEC Firewall regulations and little common sense or financial prudence left. That was for old fuddy duddies, old Scot dialect term for buttocks, not Masters of the Universe. This suggests, as we e-mailed the President’s website last Fall, bailouts may not work for long or at all if they do not produce lasting productive jobs with private economic growth to pay taxes. We further suggested the 1% Transparent Total Transaction Tax could replace disappearing income taxes as more and more municipalities are in trouble. All governments but Federal are downsizing, but not fast enough.
The Federal Government may be forced to downsize by default. The latest Municipal Halloween Trick-or-Treat was the California emergency doubling of state income tax withholding.
Bad Social Security IOUs
This latest deflationary gimmick may find cash-strapped taxpayers heading for the hills, tent villages or fallout tax shelters. In the short run, USA debt is officially just less than GDP, which might be fine for some corporations, but not during tough times. This does not include certain long run fiscal realties: bad IOUs for Medicare and Social Security carried as assets, Unfunded Fed mandates in excess of $104 Trillion, $454 Trillion in global derivatives imploding Big Banks at ground zero.
CIT could be the straw that finally breaks the backs of the banks. Even with accounting gimmicks avoiding mark to market with accrual accounting, there remain fatal financial days of reckoning for toxic derivative debt assets strangling global economies and markets. It is no longer business as usual unless we are asleep or in denial. There are $31 Trillion of Credit Default Swap Derivatives including CIT.
If interest rates rise to reflect capital risk, there are $414 Trillion of hidden Interest Rate Derivatives at risk of compromise or default. Derivative-risk pricing models may fail again as they did in 1998 and 2008. Black Swan III outliers could gather freakish momentum like so many snow boulders accelerating downhill.
No Need for an Audit
We may witness the final breakdown of the biggest banks with closed access to ATMs, indefinite banking holiday and no more bailout or stim packages. Are we prepared with enough safe dollars and food to make do? The 20:1 leveraged private Fed would be in terminal trouble with toxic or even Treasury assets falling more than 5% and wiping out their equity. In the good old days the Fed did not monetize anything that might move. At least there would be no need for an audit.
The widespread fallacy is Helicopter Ben will drop Ben Franklins from helicopters. Have we in fact seen any evidence of that? That fantasy might be right up there with government bailouts, defense, healthcare, mortgage and welfare promises. People who do not appreciate the contracting money multiplier and economy may be mesmerized by a failing liquidity rally. They ignored a defacto 84% devaluation of the dollar since 2001. They dare predict business as usual with bailout inflation nation showing up any day now. They may expect to get their gold and silver ounces and junk silver accepted and changed at the Safeway at market instead of face value, which is $50 for Gold Eagles, $1 for Silver Eagles and under a buck for junk silver. We prefer Trailing Buy and Sell Stops protecting profits to trusting fantasy predictions. The experts did not predict the Fall of 2008, nor the Fall of 2009. They claimed all was well in 2008 and in 2009 they claimed the worst was over, with recovery here or just around the corner, like they did from 1929.
Deflationary Implosion
We are prepared for deflationary implosion first, then rapidly rising inverted interest rates as the scramble for cash everywhere overwhelms FGT Fed, Government and Treasury printing presses and promises. We are prepared for FGT loss of ability to create debt and spending program money out of thin air. We are prepared for FGT loss of ability to secure toxic assets with more debt usury beyond the capability of global economy or taxpayers to swallow or service. In retrospect, millions may wake up to say, How were we ever so foolish as to trust government promises versus cash in hand? Federal Reserve notes backed by debt usury and government spending actually robbed us of our wealth. Call it capital contagion.
Surviving on One’s Wits
Germans with diamonds, gold and silver found they did not buy freedom from the concentration camps. Only faith and quick wits helped them survive. We could be on the verge of catastrophic capital market cascade failures in this age of the financial internet and credit card.
Do we keep the faith and discipline? Meanwhile, our $2000 Annual Moneyback Guarantee Big4 Asset Allocation Report and $1000 Annual Moneyback Guarantee Seasonal Outlook Letter were on the right side of the markets, making money and preserving profits in tough times. CDE bought last Fall was up 6.9 times in less than a year. Past performance is no guarantee of future results, maybe better. Click here for details.
Aloha Barry, Patrick, Paul and Ackerman Acolytes
I am semi-retired, have only a few subscribers and accredited incentive management accounts with closely-held companies, and do not give specific public investment advice. I am out of CDE, which went from $3.60 to $24.86. I am currently accumulating Dollars, XOM and growth values like LVLT with trailing stops. This may change without notice. I leave daily market calls to people who are reliably good at it like Rick.
If I were a younger man, I might be looking ahead at the legalization of marijuana like the Bronfman/Kennedy families and Prohibition. What will all those people in prison for pot do as they are released because jails are overcrowded and governments can’t afford them or illegals?
The dollar going up with precious metals going down during deflation could surprise a lot of people accustomed to betting on inflation. It pays well to keep an open mind and use Trailing Buy and Sell Stops to preserve profits.
If gold hits $10,600 or higher with hyperinflation, after years or even decades more of deflation and war like the Thirties and Forties, with dollars the only valuable money available for some time, then both may be true at significantly different times.
An Amero backed by gold or silver may not practical now because of the imbalance between debts, income, prices and precious metals in America, Canada and Mexico. If/when debts, prices and wages get down to 1932 peso levels, maybe. Amero pictures posted on the internet are bogus. The Amero has the same issue the Euro has: productive Northern economies benefit at the expense of Southern unemployment.
http://www.snopes.com/politics/business/amerocoin.asp
Feds pushed on the proverbial string with more of the same debt and deficit government spending that got us into Bubbles and Depression. The Feds got a lot of help from monopoly media. A few more election upsets with official unemployment numbers over 10%, a quarterly GDP less than 3.5%, and even the majority mass media that voted for ObamaNation HealthCare Bailouts may think twice.
We trust John Williams’ 22% unemployment numbers at ShadowStats.com because headline official numbers count part-time employed as employed (U-6 numbers are rarely reported). Many unemployed were dumped off government rolls and stats after a year, perhaps after two years with the latest proposed legislation, meaning even the official unemployment numbers may continue to climb. The devil may be in the details.
http://www.shadowstats.com/alternate_data
JW figured the 1980 CPI fell from 13% last year to 6% this year. This was not reported in official headline numbers with multiple revisions to keep government COLA Cost of Living Adjustments down on government military pensions and social security. CPI is basically a measure of the cost of government.
The Fed stopped providing M-3 (Shadowbank) numbers in 2006, claiming M-2 had all the info. In fact, M-3 includes Credit, vitally important to the deflation going on now. If we look at ShadowStats M-3, we see Credit rolling over from 17% growth in early 2008 just after the stock market peaked, and now approaching 2% growth, less than the real CPI, suggesting more deflation may be ahead.
While we’re looking at Alternate ShadowStats, let’s note GDP growth peaked at 7% in 1984, the dollar peaked at in 1985, and bottomed in 2008. The contrary opinions of popular gurus, inflation fear headlines and seminars may confirm this. As Steve Forbes says, a cheap dollar is a form of (failed) protectionism. He says the American people will not allow this to continue; low interest rates mean the financial system is not functioning.
With much respect for Chuck and Rick, deflations are ultimately not kind to precious metals, which may be approaching bubble status like Buffett bonds.
In practical prosperity terms, we sold the Palo Alto property, went to Hawaii and are selling the Tahoe property. We have canned goods and are getting an efficient floor freezer with renewable energy generators to ride out diesel supply disruptions and empty food shelves. Growing our own off the grid makes a lot more dollars and sense as government services break down.
Ron Paul recently reported his Fed Audit bill was gutted by Barney Frank and Mell Watt from North Carolina where BAC is headquartered. Dr Paul hopes to pass an amendment to return it to a full audit. Maybe. Time will tell.
http://www.bloomberg.com/apps/news?pid=20670001&sid=atc2o1ijLRno
The comparison of derivatives to horse tracks may be apt with the house making money at the expense of the players. The analogy may break down when contingent obligations of naked option sellers are included. It is absolutely correct looking at bottom lines or totals does not tell the whole story. One man’s debt is another’s asset in the case of Intergovernmental Debts and off balance sheet toxic assets. The House may keep the vigorish, but lose big if it starts betting. With nominal OTC derivative open interest so large, there may be enormous winners and losers less the vig over coming decades. Banks or Buffett may think they are hedged against counterparty and market risk with their price models. They can lose big with continuing deflationary defaults like LEH, GM, AIG and CIT with market declines for which they are on the hook. Banks and government can only transfer costs and risks to taxpayers for so long before people vote with their feet. Judging from the decline in market volume since SPX 666 and last Fall, this happened. How long can BAC, C, GS, JPM, MS and WFC trade profitably with each other? As Rick notes, something may be going on with GS currently targeting 150, perhaps debt deflation with a liquidity trap.
http://stockcharts.com/charts/gallery.html?gs
We do not assume the fetal position or the legal system will survive intact.
Regards*Rich
JubileeProsperity@gmail.com