Concocting “synthetic” securities once again.
The craziness on Wall Street, the reckless for-the-moment-only behavior that led to the Financial Crisis, is back. This time it’s Citigroup that is once again concocting “synthetic” securities, like those that had wreaked havoc five years ago. And once again, it’s using them to shuffle off risks through the filters of Wall Street to people who might never know.
What bubbled to the surface is that Citigroup is selling synthetic securities that yield 13% to 15% annually—synthetic because they’re based on credit derivatives. Apparently, Citi has a bunch of shipping loans on its books, and it’s trying to protect itself against default. In return for succulent interest payments, investors will take on some of the risks of these loans.
The first deal of this type was negotiated privately with Blackstone Group and closed last December. This second deal will be open to a broader group of institutional investors. Soon, similar synthetic securities will be offered to the treasurers of small towns in Norway.
But shipping loans are a doozy. After its bubble, the shipping industry fell into a deep crisis. It’s such a problem that Andreas Dombret, member of the Executive Board of the Bundesbank, listed it as one of the four risks to overall financial stability in Germany—in Hamburg alone, there were over 120 shipping companies. He fingered two causes: shipping rates that had plunged during the Financial Crisis and never recovered, and continued overbuilding of ships of ever larger sizes, driven by “cheaply available financial means,” a direct reference to the easy money handed out by central banks.
And then he waded into the bloodbath in Germany: retail funds that blew up and were shuttered, banks whose shipping portfolios suffered heavy hits, an industry that was breaking down…. Capital destruction, the inevitable consequence of central-bank passion to create bubbles. Now, the Bundesbank was looking at it from a “broader perspective,” he said, with an eye “on the stability of the entire financial system.”
There was some good news for headline scanning algos this morning, when both personal incomes and spending came in modestly higher than expected, with incomes rising 1.1% compared to an estimated 0.8% increase, while spending was up 0.7%, also higher than the 0.6% expected. But while the superficial headline grab did indicate a modestly better climate for both spending and incomes, it was a look under the cover once again that revealed the full extent of the pain that US consumers continue to find themselves in, over 5 years since the start of the second great depression.
First, the bulk of the bounce in spending was driven by a surge in Non-Durable Goods, which rose by $48.5 billion in one month, and amounting to 61% of the total increase in personal outlays in February. This was the biggest monthly jump since the onset of the financial crisis: hardly inspiring much confidence for those companies which are wondering whether to ramp up capital expenditures and spending, especially since spending on Durable Goods declined by $400 million in February.
Second, while incomes did rebound after the plunge in January, the modest increase represented a rise in the personal savings rate to just 2.6% – the second lowest monthly savings print since 2007, excluding only the abysmal January 2.2% print. In other words, there is hardly much if any new room for additional spending with the savings rate nearly at record lows, and with US consumer continuing to reduce their outstanding revolving credit, the Q1 retail sales miracle will hardly be repeated in future months as US consumers seek to rebuild some cash buffer.
For those claiming there is something called a “recovery” underway, perhaps they can point out just where on this chart of Real Disposable Income per capita one can find said recovery. Because we are confused: with the average Real Disposable Income of $32,663 per person, or lower than where it was in December 2006 ($32,729), one may be excused for scratching their head.
Earlier this month I shared that cash levels/negative net worth in brokerage accounts were nearing the lowest levels in history. (see post here) The last three times levels were this low the market fell in price.
My mentor Sir John Templeton said the four most dangerous words in investing are…”It’s different this time!”
The chart below reflects something “IS DIFFERENT THIS TIME!”
CLICK ON CHART TO ENLARGE
The inset in the above chart reflects that Negative Net worth and margin debt are reaching levels not seen many times in history. The last couple of times this combo took place the stock market retreated a little bit in 2000 and 2008.
Is anything different this time around? One thing that is different this time around is…if take two extreme emotional market price points, (1987 high and the 2002 lows) and draw a support/resistance line into the future, it happens to come into play where the S&P 500 is RIGHT NOW!
The politicians of the western world are coming after your bank accounts. In fact, Cyprus-style bank account confiscation is actually in the new Canadian government budget. When I first heard about this I was quite skeptical, so I went and looked it up for myself. And guess what? It is right there in black and white on pages 144 and 145 of “Economic Action Plan 2013? which the Harper government has already submitted to the House of Commons. This new budget actually proposes “to implement a ‘bail-in’ regime for systemically important banks” in Canada. “Economic Action Plan 2013? was submitted on March 21st, which means that this “bail-in regime” was likely being planned long before the crisis in Cyprus ever erupted. So exactly what in the world is going on here? In addition, as you will see below, it is being reported that the European Parliament will soon be voting on a law which would require that large banks be “bailed in” when they fail. In other words, that new law would make Cyprus-style bank account confiscation the law of the land for the entire EU. I can’t even begin to describe how serious all of this is. From now on, when major banks fail they are going to bail them out by grabbing the money that is in your bank accounts. This is going to absolutely shatter faith in the banking system and it is actually going to make it far more likely that we will see major bank failures all over the western world.
What you are about to see absolutely amazed me when I first saw it. The Canadian government is actually proposing that what just happened in Cyprus should be used as a blueprint for future bank failures up in Canada.
The following comes from pages 144 and 145 of “Economic Action Plan 2013? which you can find right here. Apparently the goal is to find a way to rescue “systemically important banks” without the use of taxpayer funds…
Canada’s large banks are a source of strength for the Canadian economy. Our large banks have become increasingly successful in international markets, creating jobs at home.
Confiscating the customer deposits in Cyprus banks, it seems, was not a one-off, desperate idea of a few Eurozone “troika” officials scrambling to salvage their balance sheets. A joint paper by the US Federal Deposit Insurance Corporation and the Bank of England dated December 10, 2012, shows that these plans have been long in the making; that they originated with the G20 Financial Stability Board in Basel, Switzerland (discussed earlier here); and that the result will be to deliver clear title to the banks of depositor funds.
The National Government [is] pushing a Cyprus-style solution to bank failure in New Zealand which will see small depositors lose some of their savings to fund big bank bailouts . . . .
Open Bank Resolution (OBR) is Finance Minister Bill English’s favoured option dealing with a major bank failure. If a bank fails under OBR, all depositors will have their savings reduced overnight to fund the bank’s bail out.
ALL WARS ARE BANKERS WARS
Jim Willie is able to provide inside information from sources who know what is happening behind the scenes.
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