Black Coffee: The Waiting Game

It’s time to sit back, relax and enjoy a little joe …

Welcome to another rousing edition of Black Coffee, your off-beat weekly round-up of what’s been going on in the world of money and personal finance.

I hope everybody had a wonderful week. And with that, let’s get right to this week’s commentary, shall we?

We can’t change the cards we are dealt. We can only change how we play the game.

– Randy Pausch

Credits and Debits

Debit: Did you see this? Last week, the London Metal Exchange (LME) discovered in a Rotterdam warehouse bags of stones instead of the nickel that was supposed to be underpinning some of its contracts. The revelation delivers yet another blow to dwindling confidence in the embattled metals exchange. That begs the question: How much of the LME’s supposed physical gold and silver holdings are also illegitimate? (Psst. Here’s a hint: It’s far more than the fraud imposed on nickel.)

Debit: According to Bloomberg, the amount of metal in the $1.3 million scam “represents just 0.14% of nickel inventories on the LME, so the immediate impact is limited. But the announcement has much wider implications: In an industry riddled with scandals, the LME’s contracts are viewed as unquestionably safe.” Correction: They were viewed as unquestionably safe. At least by those who prefer to live with their head in the sand.

Debit: Speaking of scams, did you know that banks only have to reveal bond market value losses if they actually have to sell those assets to raise the cash to pay their depositors? It’s true. Accountants are allowed to price their bank’s assets at book value based on the price that was paid to acquire them – without regard for what these investments are worth today. Thankfully, the recent run of bank failures looks like it has finally awakened the public to the fact that the banks’ quarterly assets-and-liabilities reports don’t reflect market reality. That’s good, because there’s plenty of evidence to suggest the banking system crisis is far from over. Is Deutsche Bank next?

Debit: Meanwhile, the risk of banking contagion continues as large depositors are moving their cash from smaller regional banks to a handful of too-big-to-fail national banks. Unfortunately, there aren’t many good options for those trying to avoid a banking system collapse. Okay … maybe one. Or not.

Credit: The move to bigger banks didn’t stop Credit Suisse from being bought by UBS this week – at the point of a government gun – for pennies on the dollar because the ailing bank was “too big to fail.” Yes; it’s a dubious concept. Asks financial commentator Franklin Sanders:”Ain’t a bit of moral hazard in this anywhere, is there? I mean, if you knew your business would be bailed out by the government no matter how moronically you ran it, you’d still be diligent and conscientious in running it, right? Sure. And y’all think I’m exaggerating when I say the banks run the world.” Indeed they do. Unfortunately for us, the ones in charge are incompetent boobs. Behold Exhibit A …

Debit: By the way, government officials used a ‘systemic risk exception’ that directed FDIC insurance to cover depositor losses, even though the Dodd-Frank Act specifies that the US Treasury, FDIC, and Fed should use something called Orderly Liquidation Authority (OLA), which shifts the burden away from taxpayers. And while “Exhibit A” insists that taxpayers are off the hook, the truth is, every bank pays FDIC insurance premiums, which are passed on to depositors who are, wait for it … taxpayers. Let’s hope US pension managers – many of them millennials who have yet to navigate a major financial crisis – are doing a better job than their banking counterparts.

Credit: According to risk analyst Paul Kopek, since banks will now pay higher FDIC premiums to cover the recent banking sector losses, “they have a right to know why the Treasury, Fed and FDIC didn’t use OLA to resolve SVB.” Well … because they believed at the time that the only way to maintain confidence in the system was to remove the FDIC insurance deposit limit. Yes; that’s a tacit admission they’ll use the money printer to fully “insure” all $18 trillion currently deposited in US banks from now on – but that doesn’t matter to Keynesian economists. That being said, our friend, “Exhibit A,” now appears to have contracted a case of cold feet:

Credit: Unfortunately, the fire in the banking system is far from contained. In fact, billionaire asset manager Jeffrey Gundlach warned this week that “the Fed is broke; its balance sheet is negative $1.1 trillion – and there’s nothing they can do to fight any problems except for printing money. The Fed used to send money to the US Treasury; now the Treasury sends money to the Fed. We don’t have any road left to kick the can on fiscal and monetary policy.” Uh huh. The good news is the mainstream media keeps assuring us that the Fed has everything under control – so there’s nothing to worry about. Yes, yes – just like in 2008 …

Credit: If you believe macro analyst Daniel Oliver, Mr. Gundlach is definitely on to something. According to Oliver, “the Fed is essentially a giant SVB: it purchased trillions of US dollars (USDs) of fixed-rate securities at ridiculously low interest rates and is now carrying enormous unrealized losses. Since its own deposit rate – what it pays on reserves and on its reverse repo facility – reflects the Treasury rate, it also has large operational losses.” Yes; the Fed can print what it needs to cover those losses – but at the USD’s expense via declining purchasing power. It’s a game that will end when confidence in the USD is finally broken.

Credit: For now, the Fed and its beleaguered chairman, Jerome Powell, continues to play its confidence game. The trouble is, we’re now in the end game and the outcome is no longer in doubt. In fact, Mr. Oliver says it’s quite clear: “Jerome Powell has lost. Like Arthur Burns in the 1970s, he has discovered that abruptly higher rates threaten stability long before retail prices stop rising.” Yes; Powell has definitely lost. However, he has no choice but to keep playing – which is why he raised the Fed Funds rate another 25 basis points on Wednesday. For the banking sector, you can bet that went over like a porcupine at a balloon toss.

Credit: Of course, it’s not just highly-respected Austrian-school economists who can see that the Fed – and its debt-based fiat monetary system – is running out of time. Every exporting nation is well aware that it costs the United States just 17 cents to print a $100 bill, while they must produce $100 worth of goods or resources to acquire the same amount of currency. With that in mind, do you really think the status quo is going to continue far into the future? Or do you think a majority of the world’s producing nations are going to gravitate towards a fairer monetary system that also shelters them from the coming storm?

Credit: Speaking of finding shelter from storm, both Gundlach and Oliver suggest that gold is one of the few safe harbors left. How much faith do they have in the yellow metal’s prospects going forward? If you ask Mr. Oliver, it’s quite a lot. “At this point,” he says, “it’s hard to know which is better for gold. More rate hikes that accelerate a major banking crisis – or a pivot to more money printing now.” That sure sounds to me like another way of saying “gold (and silver) is wealth insurance.” Well … assuming that kind of thing interests you. Then again, you can also do nothing. Either way, it’s your money.

Last Week’s Poll Results

Do you think credit unions are safer than traditional banks?

• Yes (59%)
• No (41%)

More than 2100 Len Penzo dot Com readers responded to last week’s question and it turns out that almost 3 in 5 of them believe that their deposits are safer in a credit union than a traditional bank. I have no idea if that is true myself, but if you pressed me to give an answer, I’d have to agree – if only because I assume they’re inclined to be more conservative than commercial banks.

If you have a question you’d like to see featured here, please send it to me at Len@LenPenzo.com and be sure to put “Question of the Week” in the subject line.

The Question of the Week

[poll id="467"]

By the Numbers

A recent study analyzed numerous search terms related to improving a credit score across every US state. That data revealed the US states whose residents are the most – and least – eager to maximize their credit score:

50 New Mexico (Search volume: 54 per 100,000)

49 West Virginia (56 per 100,000)

48 Iowa (57 per 100,000)

47 Idaho (58 per 100,000)

46 Louisiana (59 per 100,000)

5 Maryland (142 per 100,000)

4 Delaware (147 per 100,000)

3 Georgia (148 per 100,000)

2 New Jersey (211 per 100,000)

1 New York (217 per 100,000)

Source: CreditBuildingTips.com

Useless News: Police Blotter

An elderly man was going up to bed, when his wife told him that he’d left the light on in the garden shed, which she could see from the bedroom window. George opened the back door to go turnoff the light but saw that there were people in the shed stealing things.

He phoned the police, who asked, “Is someone in your house?”

“No,” said the old man, “but several people are breaking into my garden shed and stealing from me.”

Then the police dispatcher said, “All our patrols are busy. So lock your doors and an officer will be along as soon as one is available.”

So the man hung up the phone and counted to 30. Then he phoned the police again.

“Hello, this is George Phillips. I just called you a few seconds ago because there were people stealing things from my shed. Well, you don’t have to worry about that anymore because I just shot and killed them all; my dogs are eating them now.” Then he hung up.

Within five minutes, six police cars, a SWAT Team, a helicopter, two fire trucks, a paramedic and an ambulance showed up at the Phillips’ residence and caught the burglars red-handed.

After the perps were put in handcuffs, one of the policemen said to George, “I thought you said that you’d shot them!”

George replied, “And I thought you said there was nobody available!”

(h/t: RD Blakeslee)

More Useless News

Here are the top five articles viewed by my 45,473 RSS feed, weekly email subscribers, and other followers over the past 30 days (excluding Black Coffee posts):

1. 18 Personal Finance Facts You Didn’t Know About the US Presidents
2. Why Buying Gasoline in the Morning Can Save You Money
3. Credit or Debit: Which One Is Better?
4. How to Know If You’re Dating a Deadbeat
5. What Defines Financial Success?

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Letters, I Get Letters

Every week I feature the most interesting question or comment assuming I get one, that is. And folks who are lucky enough to have the only question in the mailbag get their letter highlighted here whether it’s interesting or not! You can reach out to me at: Len@LenPenzo.com

After reading my post explaining why expensive luxury cars don’t impress smart people, Rafael said:

“I wish people were half as enlightened as you.”

Thank you, Rafael … but if you listen to my detractors, they’ll say your wish would make most folks quarter-wits.

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Photo Credit: public domain