Banks Pay for the Bubble Years by Bill Bonner London, England As we all know, the depression is over. The stock market seems to think so...with the Dow up 32 more points on Friday...and apparently eager to go higher. Oil rose above $64. And gold is trading at $937 this morning. Friday, two more banks - the Bank of America and Citigroup - announced impressive results. Between them, they made $5.4 billion in the last quarter. These follow announcements earlier in the week from JPMorgan and Goldman. As reported in this space, Goldman set the pace by reporting that it has managed to earn more than $1 billion per month, in the 2nd quarter of this year. It said it did so by helping clients raise money...refinance...and restructure. Deals. Deals. Deals. Goldman made so much money that it has set aside more than $11 billion so far this year in compensation for its executives - or about half of its revenues, according to The Economist. During the same period, shareholders got $4.4 billion, barely a third as much. This, by the way, is the same firm that suffered a near-death experience along with the rest of Wall Street about six months ago. In order to save itself, it turned to Washington for cash. It was at that point that we at The Daily Reckoning noticed the appalling state of modern American capitalism - the capitalists didn't have any capital. What happened to the money? They had paid it out to the managers and proles. Lehman Bros., for example, ran out of cash in 2008 and had to be put down. It was a very profitable firm during the bubble years; but $55 billion was paid out to employees in the 10 prior years. When it was flush, Lehman should have given more money to the politicians. The feds had cash; heck, they make the stuff. Its competitor, Goldman, only had to whistle and the United States government - dominated by former and future Wall Street pros - rolled over. The feds put up the money, lickety split. And now that Goldman is rolling in dough again, does it carefully husband its resources, restocking its shelves and refilling its vaults, so it will no longer be a burden on the taxpayer if things go bad? Nooooo...like a welfare queen in a pink Cadillac, it spends every penny, confident that it can lean on the feds next month as well as the last. But now, look. After all our whining and complaining about the bailouts - they must be working, right? The big banks are making money again...big money. And that must mean the economy is on the mend. They're lending...they're speculating...they're rolling the dice and...hallelujah...a pair of boxcars! But wait. Ken Lewis of Bank of America says, "Profitability in the second half of the year will be much tougher than the first half..." How come? Because the banks' core business is actually getting worse! The core business of banking is lending to people who are capable of paying it back - out of earnings. If the borrower is counting on higher house prices...or higher stock prices...to allow him to refinance on better terms, the lender is asking for trouble. Prices may go up...or they may go down. And if they go down, down goes the lender's collateral too...and his hope of getting repaid. The banks made big mistakes in the bubble years. And now they're paying the price. But so far, they've only made the first installment payment. Subprime loans started going bad two years ago. Then, people began losing their jobs...and loans of all sorts were in trouble. There is no sign that this process is over. Instead, it is merely proceeding in good order...just as you'd expect. California lost another 65,000 jobs in June. And in Pennsylvania, 17,800 people are running out of jobless benefits. This group is on the cutting edge of a huge new trend - people not only unemployed, but out of unemployment benefits. One estimate says there will be more than half a million of them nationwide by the end of September. You think they were cutting back on spending last month? Let's see what they do in October. And let's see what happens to their debt...those Alt-A, jumbo, and prime mortgage loan... ..and let's see what happens to credit card debt...and to commercial loans too. There's a report that New York commercial properties are running up towards a 23% vacancy rate... Shoppers not shopping...stores and restaurants closing their doors...unemployment going up - sounds like the depression might not be over yet... [You can make sure that the crisis doesn't hit home... set up your own personal 'emergency bailout'. All the resources you need to get started can be found here.] More news, from The 5 Min. Forecast: "In America, the housing market rejoices: housing starts climbed an unexpected 3.6% in June," writes Ian Mathias in today's issue of The 5. "According to the latest from the Commerce Department, builders broke ground on new homes at an annual rate of 582,000 in June, well above the Street's expectations and the 'best' month for housing starts since November. Curiously, single-family homes led the way, with a 14% building boom from the month before. That's the biggest one-month gain since 2004.And back to Bill, with more thoughts: A milestone: Harry Allingham, the world's oldest man, died on Saturday at the age of 112. He was a veteran of WWI. To what did he attribute his longevity? "Cigarettes, whisky and wild, wild women..." In addition to the banks' profit reports, something else happened last week that convinced investors that not only is the worst over, the economy worldwide is actually getting better. China announced that its economy was growing at almost 8% annually. If China can grow at 8% - even in a depression - our troubles are over, said investors. China is not so much a green shoot; it is a whole rain forest of growth. And if it is growing, it needs stuff. So the people who supply stuff think they are sitting pretty. And the economists who watch the flow of stuff think they see the end of the depression. China has "decoupled" from the rest of the depression-ridden globe...they believe. It is on a planet of its own, where the collapse of demand here on Earth means nothing. "China's got plenty of demand right at home," says the cheerful crowd. Of course, we're cheerful too. We make a point of it. Recession is no problema for us, here at The Daily Reckoning. We take what nature gives us without complaint. Depression? Credit crisis? Hyperinflation? As George W. Bush so eloquently put it: 'Bring 'em on.' [And when the stocks in Shanghai take a beating, we'll be prepared...and you can be too. Learn all about a simple hedge that will protect you from a possible Asian meltdown here.] We feral economists have never had it so good... We won't be disappointed, no matter what happens. It's all good, as far as we're concerned. Except for the parts that ain't so good. And as we were saying last week, there's something fishy about the end of the depression...at least as proclaimed thus far. Looked at more closely, the banks' earnings don't seem plugged into prosperity at all; instead, they're drawing juice from the crisis itself. Their profits come from refinancing...playing the rebound...and the feds' bailouts - not normal banking activities. And as for China, we will have to wait to find out. But if China has managed to shift its production from export to the domestic market in just six months, it will be a triumph equal to Custer's victory over the Sioux at Little Big Horn. Details to follow... In the meantime, The Economist magazine, that august font of accepted wisdom, tells us "what went wrong with economics." Nobel Prize winner Paul Krugman remarked that the learning of the past 30 years in macroeconomics was "spectacularly useless at best, and positively harmful at worst." The Economist responds: 'What went wrong with economics?' it asks. Not much, it concludes. Except that its most precious theories are claptrap. And its most prominent experts are nincompoops. And it helped cause the biggest economic crisis in perhaps half a century...failed to see it coming...failed to understand it...and then made it worse by offering to fix it. Apart from that...macroeconomics is fine. We went to Madrid on Friday... The only convenient flight was a discount carrier - Easy Jet. But as it turned out, there was nothing easy about Easy Jet. The flight was meant to be about 9 PM, so we went to Plaza Mayor and sat down for a drink. In front of us was a man with an enormous stomach, dressed in a Spiderman costume. If you lose your job, dear reader, you might want to try this. People came up to the misshapen Spiderman to have their photos taken with him. They all seemed to know the pose they wanted...a bit as if they were flying through the air. When the photo was taken, the tourists left Spiderman a tip. By our calculation, he was taking in 20-40 euros per hour. Then, at the airport, we waited in line for half an hour - there was no one at the counter - only to discover that the flight was delayed. Then, it got later and later...as one delay followed another. Each time an airline representative approached the crowd with an announcement, the passengers became more hostile. "Why didn't you tell us this before?" "I want a refund!" "I could have gone back into town and had dinner..." We waited and waited...tantalized by the arrival of an Easy Jet plane...then disappointed when it was destined for another city. We were trapped. There were no other options. Finally, it was about midnight when the representative came back...flanked by two Spanish policemen. Finally, the plane was on its way. Finally, we got home again...after 4am. Until tomorrow, Bill Bonner The Daily Reckoning P.S. Tomorrow kicks off our Agora Financial Investment Symposium in Vancouver, B.C. Look for reports from the conference in these pages, and get live updates by following us on Twitter. Sign up for a free account and follow us here. | ||
| The Daily Reckoning PRESENTS: It's no secret that the US money supply is increasing; but by how much is often a heated topic. Between M1, M2 and M3, there's are more than a few discrepancies... But as the Mighty Mogambo points out, no matter what measure you use, one thing is certain... The US financial circulatory system is in deep trouble. Read on... Financial Circulatory System by The Mogambo Guru Tampa Bay, Florida I was surprised to see that the government made $81.4 billion in cash out of papers, inks, and base metals in the last year, taking the total Cash in Circulation (essentially the M1 money supply) to $907.4 billion, whereas the M2 money supply is about $8.3 trillion (9 times larger) and (saving the best for last) the M3 money supply, which counts everything that can possibly be construed as "money" in the most liberal sense and making all kinds of assumptions, is almost $15 trillion, as close as anyone has been able to figure out, meaning that the money supply, at least as measured by M3, is now larger than the economy of USA! For all you "velocity" freaks out there - and there are quite a few of them - substitute GDP as the "P" times "Q" part of Fisher's famous equation MV=PQ (or, Money supply times Velocity of money equals Price of everything sold times Quantity of things sold) and you get a Velocity of less than 1! Hahaha! What in the hell is a velocity of less than 1? Hahaha! Before you fire off another venom-laced email where you insult my intelligence just because I sound so stupid, act so stupid and look so stupid, I already know it doesn't mean anything that I can understand, mostly because I am kind of, well, stupid. But it is only an example of the kind of weird, strange crap you will see from now on, especially when all those trillions of dollars that have been created are exchanged for toxic assets, and all the future trillions of dollars to be printed by the Federal Reserve to finance the government's massive deficit-spending, start burning a hole in somebody's pocket, probably thanks to Congress coming up with some new "Get 'em buying!" tax scheme that will, inevitably, backfire and make everything worse and worse until it all collapses into what we hotshot professional economists call a Big Worthless Pile Of Financial Crap (BWPOFC).
And the reason that I am so sure of things turning into a BWPOFC is that, as Milton Friedman so famously said, "Inflation is always and everywhere a monetary phenomenon," which seemingly guarantees inflation in consumer prices as a result of all of this new money flooding into the world's economy, which is a monetary phenomenon in itself, in that it has only been tried by desperate countries in a last-ditch, kamikaze blaze of what they hoped would be glory, but was instead, always and everywhere, turned out to be just stupidly suicidal. And how much inflation can one expect? Good question! The answer is remarkably symmetrical, as Howard Katz of thegoldbug.net says, "Over the past year, the amount of money in the U.S. has increased by almost exactly $1 trillion. This is a 70% increase from a year ago," and "it will cause an approximately 70% increase in prices with a 1-2 year lag time," which, looking at my watch before realizing it does not have a calendar, has already been 1 year of this "1-2 year lag." Billionaire Warren Buffet, who is not given to hyperbole and outlandish forecasts, says that he expects inflation to be as bad as it was in the '70s. And how bad was that? Mr. Katz says, "The greatest price increase in American history was 13.3%, in 1979." And if you don' think that gold will shoot up when inflation starts roaring like that, then you are obviously new at this investing business and you haven't had time to look at what happened to the price of gold when it was $35 an ounce in 1970 and over $800 an ounce by 1980 when the inflation (from the vast expansions of the money supply needed to simultaneously finance the War on Poverty and the War in Vietnam) was rising along this same parabolic ride. Until next time, The Mogambo Guru for The Daily Reckoning P.S. However, I am sure that after you have been around the "world of investing" a few minutes, you will see, with crystal clarity, that buying gold means "Whee! This investing stuff is easy!" | ||
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