As U.S. Banks Deteriorate, Obama Proposes New Regulation

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


President Obama proposed placing new limits on the size and activities of big U.S. banks on January 21st. The new plan, known as the Volcker Rule, would effectively prevent banks from owning hedge funds and private equity funds and seeks to place curbs on the market share of liabilities for any given firm. It follows last weeks proposed new tax on the big banks to recoup losses from the 2008 bailout. The administration apparently hadn't informed Wall Street about the impending news. The U.S. market was caught off guard and predictably sold off sharply with the banks leading the way. The European and Asian markets sold off in sympathy.

Recent earnings on the big banks have shown that their loan portfolios are continuing to deteriorate. Fourth quarter regional bank earnings confirm that little if any improvement has taken place since the depths of the Credit Crisis. BB&T (BBT) earnings fell 36% last quarter and its provision for credit losses were $725 million versus $197 million in the fourth quarter of 2008. Huntington Bancshares (HBAN) losses on its commercial real estate portfolio were $258 million in the fourth quarter versus $169 million in the third quarter. SunTrust (STI) non-accrued loans are now $5.40 billion, down $42 million from the previous quarter, still very high and barely getting better.

While it is possible something may eventually come from the Obama proposals, investors shouldn't expect that they are a done deal.  In his signature, it's not my job approach, the president appeared to be leaving crucial details for his bank oversight plan to be hashed out by Congress - an institution that is perennially dysfunctional and which is viewed almost universally unfavorably by the American electorate (one recent poll found that only 21% of voters view congress favorably). This is how Obama handled his intended health care reform, which has turned into a giant boondoggle for the administration. Obama has also taken this tack with his proposed consumer protection agency that has gotten caught in partisan wrangling on the Hill. If Obama's intention is to just talk about something, but make sure nothing ever happens, he seems to have found the magic formula.

Obama took office right after the lowest point of the Credit Crisis. Like any new president, he had enormous political capital at that moment, but did very little with it. He was president for a year before he said in his press conference proposing new bank regulation that the banks nearly wrecked the economy by taking "huge, reckless risks in pursuit of quick profits and massive bonuses."  Unfortunately, we are still suffering from the after-effects of the Credit Crisis and this will be the case for some years to come. Mortgage defaults are still a major problem for the banks and a burgeoning commercial loan crisis is now taking place. In 2009, 140 U.S. banks went under, the largest number since the Savings & Loan Crisis. The administration's efforts to handle banking problems so far have been ineffective at best. It would be preferable if the Obama administration solved the current serious problems first rather than concentrating on some distant future situation.

Disclosure: None

NEXT: The Case Against Reappointing Ben Bernanke

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Does Money Printing Cause Deflation or Inflation?

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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There were $18 billion in U.S. Treasuries available for sale today and the Fed bought $7 billion of them. Increasing government debt is in and of itself inflationary. Buying that debt with freshly printed money is mega-inflationary. You would never know it from market trading today however. Oil prices dropped 4% after being down 3.5% last week. Gold was at a two week low and the trade-weighted U.S. dollar was up around 80.42 in recent trading (its break down level is 78.33). Commodity prices are supposedly trading on the bad economy and of course there is no need to worry about inflation - at least not for the next few minutes (after that, you had better worry).

The market was down most of the day, but a late day rally let the Dow close up 44 points. The S&P closed up 2, the Nasdaq down 9, and the Russell 2000 was down 3. The S&P 500 bounced off it's 200-day moving average and the Russell 2000 stayed just above its 200-day. The Nasdaq bounced off its 50-day moving average. The Dow traded well below both its 200-day and 50-day moving averages. The RSIs on the daily charts for all the indices are below 50, which is bearish. The other technical indicators don't look much better.

The media claims today's trading is because the economy is bad (so the Dow, the S&P 500 and the dollar go up - that makes a lot of sense). Vice President Biden apparently made some remarks on the weekend talk shows about how the administration didn't realize how weak the economy was. How this is news to anyone is beyond me. The Obama administration has a level of economic obliviousness that is truly astounding. This has been obvious from almost the very beginning when Obama announced the Treasury Secretary Geithner would be detailing a plan the next day to restore the financial system and Geithner then came up with no specifics at all in his press conference. The market tanked that day in case you've forgotten. Obama's plan to give the Federal Reserve more regulatory authority over the banks even though the Fed is only a quasi governmental entity that is partially owned by the banks was another real winning idea. The U.S. economy is basically being run by a bunch of 5-year olds. The only difference from the last administration is that the current 5-year olds are Democrats, while the previous 5-year olds were Republicans.

Oil is selling off for seasonal reasons and look for it to hold at one of the Fibonacci retracements, which are around $58, $53 and $48. It will be a bargain again possibly relatively soon. Oil, gold, silver and all commodities go up when there is inflation. The Fed is buying almost 40% of all treasuries for sale with money just out of the printing presses and there's not going to be inflation? Not on the planet earth. It is only a matter of time. Expect more stimulus and more bailouts from the government as far at the eye can see. Put California at the top of the list, its debt was downgraded to BBB by Fitch just a few minutes ago.

NEXT: First Four Trading Day Review

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Budget Deficit Screams Inflation

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

The Obama administration released revised estimates for the 2009 budget deficit (the difference between the yearly income and spending of the federal government) today and it now looks like it will come in at $1.75 trillion. The original estimate for the 2009 deficit made by the Bush administration in February 2008 was $407 billion. Yes, the current estimate is now more than four times the original one... and we're not done yet. For a perspective of just how huge this number is, the largest U.S. budget deficit so far according to official figures was in 2004 and it was $413 billion. The current estimate represents over 12% of GDP (the overstated official number), approximately equal to the percentage in the World War II year 1942. As bad as a$1.75 trillion budget deficit is you can assume it is a gross underestimate of the actual number.

How the original 2009 budget deficit figure was obtained is not immediately clear. The Congressional Budget office estimated a deficit of $219 billion, which did not include the $168 billion stimulus plan passed early in the year. Adding those two numbers together, you would get $387 billion. Spending for the Iraq war was also not included in the number. If you use the current absurdly low estimate of only $170 billion that would bring the figure to $557 billion, not $407 billion (much Iraq war spending seems to somehow be kept magically out the budget). I frequently run into arithmetic problems such as these when looking at government reports. Nothing adds up correctly and the final number looks much better than what you should be getting from the component parts.

There were a few voices that were questioning the deficit numbers back in early 2008. Bill Gross from Pimpco warned that the budget deficit could rise to 5% of GDP and be as high as 600, 700, or even 800 billion dollars. We at the New York Investing meetup predicted that the first trillion dollar deficit would take place during the Bush administration. While this was considered an outrageous claim at that time, it was actually too low. As with much of the Credit Crisis, things have turned out to be even worse than the most dire outlook.

No one really knows what the actual budget deficit or national debt (the accumulated debt over time) is. Many items don't appear in either and this is not limited to Iraq war spending. Toward the end of last year, it was estimated that $8.5 trillion has been spent on trying to deal with the Credit Crisis. Most of that money is not included in the budget deficit or national debt. Future obligations for social security and medicare/medicaid are also ignored. Accounting for those could raise the national debt to the $50/$60 trillion level, if not more.

Where is the money coming from to pay for all of this spending? The major source is through 'printing'. While you can not print more and more of your currency and not have it devalue (the correct definition of inflation), this doesn't stop top economists such as Paul Krugman and Noriel Roubini from constantly opining in the media about the dangers of deflation. Just in case the 'experts' are misguided on this one, you might want to pick up some gold and silver during their current pull back. Oil, another inflation hedge, is also a great buy at the moment.

NEXT: Citi Dives, GDP Plunges - Both Off the Cliff

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21


This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.