Weekly Wanderings 10 September 2009

As usual in these weekly musings we give you interesting thoughts we’ve discovered during the week…
One blog worth checking out is titled The Automatic Earth 

Dorothea Lange Mother and a child August 17, 1936
Drought refugees from Oklahoma camping by the roadside in Blythe, California. “They hope to work in the cotton fields. There are seven in family. The official at the border inspection service said that on this day, 23 carloads and truckloads of migrant families out of the drought counties of Oklahoma and Arkansas had passed through from Arizona entering California.”

Ilargi: Howard Davidowitz, who, if he’s not already, ought to be your favorite financial analyst, and grandfather, says hundreds of thousands of stores across the US have yet to close. Howard should know if anyone does, since retail is his field and has been for decades.

He also predicts that hundreds of banks will fail before the year is over. As I was listening to him, I was thinking that perhaps that’s a bit steep, if only simply because the FDIC doesn’t have the apparatus in place to deal with numbers like that, and certainly not with the numbers that will emerge from their books.

But then I heard big-time private equity master John Kanas claim that 1000 banks will fail over the next two years, and that does seem to fit Davidowitz’ assertion. Still, it was when I read yesterday’s FDIC report, and comments on it, that I started thinking Howard was talking about change that I, so to speak, could believe in. Not only did the FDIC state that their troubled banks list went to 416 ‘clients’, that list has little meaning unless they act on it. More significant is, as Huffington Post noted, that over 25% of all 8500 US banks, for a total of more than 2100 of them, are unprofitable today.

They are unprofitable at a time when stock markets are at insanely elevated heights compared to what happens in the real world out there, and must and will come down. At a time, also, when commercial real estate is certain to have a huge plunge ahead of it, and drag many smaller banks down with it. And obviously at a time when nobody doubts any longer that foreclosures in domestic real estate must increase dramatically this year and through at least 2015. The FDIC can’t refuse to close banks that legally need to fail indefinitely. That in itself would be, or indeed is, a huge threat to the system. Then again, so is closing them.

Davidowitz sums it up by saying the US doesn’t need more than 5000 banks. In other words, 3500 failures. There is no doubt that the Fed’s refusal to report which banks have received taxpayer funded bailouts doesn’t fit in a democratic system, but there is also no doubt that it would be a risky move. The banking system is a patient on what can perhaps best be labeled extreme life-support. Inviting the press into the ER would be pretty sure to finish off the ailment riddled body.

Not that I think that revealing reality is not inevitable. I have long said that the game is over, that both the banking system and in its wake the political system are dead and being propped up in a chair to fool people into thinking they are alive. The accumulated aggregate debt is simply too high to pay off. It’s all just a matter of time. Spending $23.7 trillion, to follow Neil Barofsky’s number, in order to do the propping up, is a very high price to pay for a few months more of a society already so deeply indebted across all levels of its organization, and indeed its entire political structure. Moreover, it does nothing to pay off the debt. On the contrary, it makes it that much worse. And, as Davidowitz says: “The banks are still in the crapper.”

That said, it should be no surprise that I fully agree with Howard Davidowitz’ assessment of the US:

“We are in the tank forever. As a country we are out of control, we’re in a death spiral.”

The demise of the financial system, as should be obvious, is also the end of politics as we’ve come to know it. It makes no difference whether you would applaud that because of the deeply seated corruption that eats away at the system like a tumor, or regret it because there is no telling what comes after. No matter how we feel about it, we will have to transition into something new. The chances that we will do so quietly are negligible, as history tells us. There’s too much power in the hands of those who have too much to lose, and not nearly enough in the hands of those who have nothing left to lose.

And that is the breaking point. People will accept just about anything as long as they feel they will lose out if there are major changes. They won’t if they feel they’ve lost all that has intrinsic value. In a consumer based society, you need to keep the customer satisfied. And the customers won’t be satisfied if they can’t consume. Closing hundreds of thousands of stores and hundreds of banks, on top of all that has come down already in the past two years, will lead to a situation from which a return to “normalcy” is no longer an option. The camel’s back can take only so many straws.

A good example of where we are going is the 38% plunge in income for American farmers. Just try and imagine that for yourself, a 38% pay-cut from one year to the next. What would that mean for your family? Where do you go from there, and how do you do it? Go out and look for work in the cotton fields?

Now we turn to Harry Newton, who writes a daily column: In Search of the Perfect Investment. Harry was a successful publisher in the Telecommunications area. He is very well known for Newton’s Telecom Dictionary — The Dictionary of Telecommunications, Networking and The Internet, now in its 25th edition — 1,273 pages and published most recently in June, 2009. Here are some excerpts from his column of Wednesday September 9

Oil, gold, metals, commodities and gold are surging. Oil gained 5.5% yesterday to $71. Gold reached $1,007.70 an ounce yesterday, the highest price since March 2008. Gold is up 13 percent this year, set for a ninth straight annual gain, reports Bloomberg.

The dollar is collapsing. Last night it fell to $1.45 against the Euro and 86.28 cents against the Australian dollar. Both the Euro and the Australian dollar, I believe, are now at their highs for this year.

Nothing fundamental happens this fast. It’s clearly rampant speculation. I’m guessing it will go on longer. The Australian dollar could easily hit par with the U.S. dollar and we could see the Euro at $1.75. There’s much been written lately that talks of the U.S. Deliberately repaying its huge debt and future spending obligations with degraded dollars — i.e. using inflation to get the government out of its economic mess.

The simplest was to play this is EWA (Australia), EWZ (Brazil) and GLD. I’m not playing oil. That one is manipulated more than any genius can handle, including me.

Watch out for the new credit and debit card fees: If I’m a nanosecond late with my LLBean Visa credit card and I owe them $101, they slap me with a $39.95 late payment fee, in addition to interest. If I go over my credit limit (whatever it is), they’ll hit me with another $39.95. Ditto for debit cards — like fees for spending more than you have in your account. The New York Times has a piece today called “Overspending on Debit Cards Is a Boon for Banks,” replete with horrific stories. Click

The depression in U.S. ad spending. This chart shows negative numbers. B-to-B is business to business, also called trade magazines. That was the business I was in. Fortunately I sold out before this happened.

Now, there’s also been lots of news this week in the precious metals sector, that you will find filed under “Latest Gold News“.

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