The Swirling Winds

Hi Gang.

Sorry for the lack of posts recently. Tax week combined with other matters have kept me busy.

Sovereign debt remains front and center on the world stage and the concern is gaining momentum.

As I have stated over and over again, we still do not fully understand the depth and breadth of the financial earthquake that rocked our financial system in 2008.

Even now, a year and a half later, we still do not realize it's significance.

It has been downplayed so much that the average person is completely oblivious in Canada to what is going on.

I note with keen interest that there were another 7 bank failure in the US on the most recent 'Bank Failure Friday'. And despite the almost complete lack of press coverage, last week's losses were extremely serious. They were the largest in any single week since the failure of IndyMac Bank on July 11, 2008.

IndyMac had assets of about $32 billion and deposits of $19 billion. Its failure cost the FDIC an estimated $8 billion.

The seven banks that failed this week had combined assets of about $25.8 billion and deposits of $19.6 billion. These failures cost the FDIC an estimated $7.33 billion.

Prior to this week, the FDIC’s estimated losses from 57 bank failures in 2010 stood at about $8.6 billion. This week’s failures practically doubled that figure, to $15.93 billion.

According to an AP article posted Friday, the FDIC’s deposit insurance fund “fell into the red last year, hitting a $20.9 billion deficit as of [Dec. 31, 2009].” With this year’s losses, the fund’s deficit has grown to at least $36.8 billion. In addition, the FDIC has a huge exposure for worse-than-expected losses on some $165 billion of assets taken over by acquiring banks.

That pretty much wipes out the $45 billion the FDIC announced it was going to raise by requiring banks to pre-pay premiums for the period, 2010 through 2012. Obligations of the FDIC will soon become obligations of the U.S. taxpayer, adding billions of dollars each year to already out-of-control federal deficits.

Speaking of out of control sovereign debt, I notice that Warren Buffett has finally broken his 'everything will be alright' facade and is now acknowledging what is coming.

From the article: "The financial crisis was stemmed by massive monetary and fiscal intervention in developed economies like the U.S. and the U.K. That's shifted a private-sector debt mountain on to governments, increasing concern about sovereign risks. One concern is that governments will print lots of new money to pay debts, undermining the value of currencies and triggering a damaging bout of inflation. 'Events in the world over the last few years make me more bearish on all currencies in terms of holding their value over time,' Buffett said."

Interest rates and inflation: the watch words of the next 10 - 15 years.

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Bank Failure Friday

As faithful readers know, bank failures in the US escalated dramatically in 2009. In 2008 there were 25.

In 2009... 140.

The 2009 total was an average of almost three per week and the most failures the United States has experienced in one year since 1992.

Because the announcement of these failures (and the actual take-over by the FDIC) are always delayed until late on Friday afternoons, Friday has come to be known as 'Bank Failure Friday' on many economic blogs.

But 2009 was just a prelude to 2010.

How do we know?

Because the FDIC has already publicly announced that they are preparing for a greater number of bank failures than in 2008 & 2009 combined.

The FDIC has set aside $2.5 billion for the handling of receiverships, almost double that allowed in 2009's budget of $1.3 billion.

The overall operation budget for 2010 has been set at $4 billion, significantly higher than that for 2009, a revised $2.6 billion.

And why is the FDIC preparing for such a huge wave of bank failures?

It's all in the chart at the top of this post (click on the image to enlarge it).

In 2006, 2007 & 2008, the defaults on a large number of resetting subprime mortgages took place (they are shown in mid green).

As the short term teaser interest rate on these mortgages can due for reset to a higher rate, homeowners couldn't negotiate a new mortgage with a new, ultra-low teaser interest rate (as they had done in years past).

That's how subprime mortgages caused the real estate collapse in the United States. Housing values fell in a few cities and when the first mortgages that came due with their ultra low interest rates (set at a two year duration before a higher rate would kick in), homeowners couldn't secure a new mortgage. In the past, because the value of the property had grown, they had always been able to negotiate a new mortgage (with a new two year, ultra low teaser interest rate).

Forced to assume the mortgage at a substantially higher interest rate - they defaulted.

As the market was swamped with a bunch of foreclosures, it drove housing values down across the USA. That triggered the same scenario with other cities subprime mortgages.

As the foreclosures picked up steam, those households with more normal mortgages were trapped because declining real estate values (from all the subprime foreclosures) meant that when it came time to renew their mortgages... they couldn't because the value of the mortgage was substantially higher than the value of the property (called being 'underwater').

No bank is going to give you a $500,000 loan on a property worth $300,000.

Now, looming on the horizon, are Prime, Alt-A, Agency and Option Adjustable Rate mortgages.

These 'normal' mortgages dramatically outnumber subprime mortgages.

Many of them are like sub-prime in that they reset at a higher interest rate, the only difference being they reset after 5-7 years instead of two.

Thus they are just coming due now.

And those who didn't have teaser interest rates that reset are facing the brutal proposition of being 'underwater'.

The end result will be the same as subprime.

The mortgages will reset to dramatically higher interest rates and/or the value of the property has dramatically fallen so renewing cannot be done without the mortgage holders bringing down the principle to the value of the property (which means paying off about $200,000 plus on renewal).

End result: another wave of defaults and foreclosures... which is what is putting all these American banks at risk.

They key element for Canadians here is that subprime was a minor player in all of this. Subprime mortgages were simply the first type of mortgage caught in the interest rate squeeze.

Look at the graph. Subprime mortgages are almost non existent in 2009 and beyond. While about 21% of all mortgage originations from 2004 through 2006 were subprime, when you add up all the mortgages due to reset from 2007 to 2015, the subprime portion of total mortgages is miniscule.

In fact, in June 2008, the total number of subprime mortgages in foreclosure or REO represent (as a percent of total housing units) less than 1/2 of 1 percent of all housing units in the United States (0.44%).

Yesterday we noted how the Bank of Canada has come out and stated that within 2 years 10% of Canadian households will be in danger of collapsing from rapidly rising interest rates.

That represents a higher percentage of all total Canadian mortgages than subprime did vs. the rest of the American mortgage family.

They are the first domino that will be affected by a dramatic change in interest rates.

And just like in the United States, when that first domino falls it can bring down the entire pack.

In Canada we don't have 'subprime' mortgages. But we do have scores of people who have taken on massive debt with ultra low interest rates that will reset. All those five year mortgages will come due for renewal. And if 10% can't handle the shock of a return of interest rates to their historic norm (over the last 20 years, that's a five year rate of 8.25%), then it means we are in a far more precarious position than the United States.

The collapse of that 10% will dramatically lower real estate values when those properties are eventually foreclosed upon and resold. When that happens, a great many of other Canadians will be in a sever 'underwater' position and will not be able to renew... further collapsing the real estate market.

In 2005 and 2006 the majority of the American financial sector ignored the looming threat these numbers represented. The only ones sounding the alarm for what was coming (and the threat it represented to the greater economy) were the likes of Peter Schiff.

In 2010, in Canada, we are just as ignorant.

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America's Bank Failure Friday hits close to home...

It's the start of a new year, and thus a new Bank Failure Friday count.

And on this first Friday of the year, we have one lone casualty... but it hits close to home.

Not too far south of us Horizon Bank of Bellingham, Washington was closed today by the Washington State Department of Financial Institutions, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver.

As of September 30, 2009, Horizon Bank had approximately $1.3 billion in total assets and $1.1 billion in total deposits.

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $539.1 million. Horizon Bank is the first FDIC-insured institution to fail in the nation this year, and the first in Washington. The last FDIC-insured institution closed in the state was Venture Bank, Lacey, on September 11, 2009.

Just think... housing values are booming here. And 20 minutes south of us, the real estate collapse is pulling down banks.

Bubble?

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Et Tu Bank of Montreal?

It's Bank Failure Friday again in America and today has the possibility to be a milestone day. Year-to-date failures are up to 99 and we await word from the FDIC on who will be lucky #100.

Speaking of bank issues, remember the rumours about Bank of Montreal trouble back in August? On the 22nd we made this post asking 'Is the Bank of Montreal in financial difficulty?'

Those questions are being raised again, this time by Moody's, the credit rating agency.

As you will recall back in August, Agora Financial's Dan Amoss claimed BMO was gaming its books and had been lying about its ability to pay shareholder dividends. As managing editor of the Strategic Short Report, a pricey Internet-based newsletter that provides 'tips' to subscribers on stocks that may be worth shorting, Amoss had issued an 'alert' about the Bank of Montreal.

Amoss said, "Mark to market accounting has not yet cut down Canadian bank earnings, because the Canadians have not yet accounted for the impending wave of mortgage, consumer loan, and corporate loan losses. They will by the end of 2009."

Amoss implied that BMO was suffering significant losses from it's loan portfolio and wouldn't be able to maintain it's dividend payments. He predicted that a dividend cut might come as soon as that week's August earnings release, which is after the August options expiration. That cut would start a sequence of events that would drive BMO's share price down significantly.

Amoss recommended, to readers of his newsletter, several market plays to take advantage of the situation.

By Sunday August 24th, the story became an honest-to-goodness Internet sensation.

In the options market on Monday the 25th, about 48,000 contracts changed hands, 34 times the usual daily volume.

The turnover included 3,405 calls and volume in the stock's puts outnumbered calls by a ratio of more than 13-to-1. The stock fell 3% during the day and the story caught the attention of the mainstream press as Bloomberg, Reuters, and several Canadian newspapers.

By opening bell on Tuesday morning the story washed-out as a non-event. BMO maintained it's dividend, announced it had increased profits; and news organizations found Amoss unavailable for comment.

We posted our disappointment in Amoss' disappearing act. It seemed like such a tremendous opportunity wasted by Amoss and Agora. Here you had a ton of attention focused by the mainstream press on Amoss. This is the type of situation tailor-made to create a market oracle.

One blog dog agreed with me and commented that "I think they were just trying to play hysteria on the Internet and create a self-fulfilling prophecy. That's why Amoss wouldn't meet with the press. He didn't have a real case. If he did, he would have done exactly what you suggested."

Agora Financial issued a statement defending Amoss and said, "Of course, there's always a chance Dan’s pick is either too early or wrong. That's the nature of speculation."

Did the jury of public opinion pass judgement on Amoss prematurely?

Renown credit rating agency Moody's Investors Service has placed BMO debt on review and says it may downgrade the bank's debt due to weaknesses in its U.S. operations

The recent period of financial and economic stress has revealed weaknesses in the bank's U.S. business, Moody's said. BMO's U.S. operations have had two consecutive years of losses, and in all likelihood 2009 will mark the third, it said.

“BMO's review for possible downgrade comes at a time when the bank has persistently reported lower risk-adjusted profitability, relative to similarly rated peers due to net losses in its US businesses,” said Moody's senior vice-president Peter Routledge. “Furthermore, a prolonged period of above average credit costs could intensify pressure on BMO's profitability.”

The U.S. accounts for nearly one-quarter of BMO's loans. The bank has about $41-billion in U.S. loans, compared to $124-billion in Canada.

Maybe Amoss wasn't quite the flake so many wrote him off to be. The next quarterly earnings reports could be interesting.

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So where are we heading?

So where are we heading?

As faithful readers know, we often profile US bank failures on Friday. This stems from our Prime Minister who early on in 2009 said, "there won't be an economic recovery until the U.S. financial system is repaired."

US Bank Failures for the year stand at 95 (will we break 100 today?).

But that pales to the list of over 400 banks who are teetering on the edge of insolvency. So dire is the looming problem that the cash-depleted Federal Deposit Insurance Corporation has hatched a plan to require banks to prepay three years of quarterly fees. The little accounting trick will generate $45 billion in cash for the FDIC, an amount it normally would've had to wait years to get its hands on.

It's an odd move because the FDIC could simply borrow money from the Treasury Department. This is well within the rules of the FDIC. The agency has a credit line with the Treasury to tap as much as $500 billion in emergency capital through the end of next year. But the FDIC is worried that if the agency, which has always been privately funded through bank assessments, borrowed money from the Treasury, it would look like a new bank bailout, eroding the sliver of confidence the public has regained in the USA's banking system in the past few months.

Instead the FDIC has arranged this 'dues pre-payment' option. But won't this hurt bank earnings or deplete lending?

It seems the FDIC is going to take advantage of an accounting quirk that allows companies to spend money on something but not actually tell their shareholders about the cost until the asset is gone. As Time magazine notes, "for you and me, it would be like shoplifting at the supermarket and then dropping off cash every time you decided to eat something. A can of beans might not cost you anything for years. The rule is supposed to match the revenue generated by the stuff a company buys with its costs, and it is called depreciation. But to anyone other than a CPA, it looks like a sleight of hand."

So US bank troubles continue and the FDIC is scrambling to prepare for an avalanche of additional failures.

Meanwhile the trend of strategic mortgage defaults in the United States gallops along, compounding the woes of the banking industry.

It all adds up to what we having been suggesting for months... that the underlying economy is still very weak and that the current stock market rally is nothing more than a bear market trap.

This means the North American economy is probably facing a continuing period of deflation over the short term. Even so, many leading deflationists think that – after a period of deflation – we will certainly get inflation.

The million dollar question is: when?

It's a crucial question. When it comes to investing, being too early is being wrong.

Someone who is positioned for inflation decades too early will get creamed. Likewise, someone who is betting on deflation for 20 years will get hurt if inflation kicks in next month.

One reader suggested in an email we might be even be facing a period of mixed-flation; inflation in some asset classes and deflation in others.

Given that speculators drove up the price of oil last year, it is possible that – especially in a stagnant economy – speculators could drive up the prices of some asset classes and drive others down.

We'll explore the issue more next week.

Let's wind up the week with Bank of Canada Governor Mark Carney's latest warning that there is "no guarantee rates will stay low" .

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US Banks: failures in a more 'traditional' manner

BFF UPDATE: Bank Failure #81 - Guaranty Bank, Austin, Texas
BFF UPDATE: Bank Failure #80 - CapitalSouth Bank, Birmingham, Alabama
BFF UPDATE: Bank Failure #79 - First Coweta, Newnan, Georgia
BFF UPDATE: Bank Failure #78 - ebank Atlanta, Georgia

It's bank failure friday and the full effects of the housing correction are starting to take hold in the United States.

As noted by the New York Times in this article, it is becoming clear that most of the bank failures this year have nothing to do with the strange financial products that seemed to dominate the news when the big banks were nearing collapse (Bear Sterns, Lehman Brothers, etc.).

The current wave of failures are from banks that are now losing money. They are going broke the old-fashioned way: They made loans that will never be repaid.

Those loans will never be repaid because they have been made for mortgages that were sound three years ago, but are now hopefully in excess of what the property is now worth.

More importantly they were made to homeowners who were, at the time, solid, employed borrowers.

As the defaults compound they are destroying many small US banks who did not get in over their heads with derivatives or hide their bad assets in off-balance sheet vehicles. Nor did their traders make bad bets; they generally had no traders. They did not make loans that they expected to sell quickly, so they had plenty of reason to care that the loans would be repaid.

But no matter. The loans are going bad, in some cases with stunning rapidity, in volumes that they never thought possible.

The sizeable drop in real estate values is triggering underwater mortgage conditions all over the United States. Homeowners are defaulting because of this condition and pulling their banks down with them.

This is exactly the condition that the Bank of Canada (and the real estate industry) have been desperate to stave off in Canada.

Jim Wigand, the F.D.I.C.’s deputy director of resolutions and receiverships, says banks that are failing now are in worse shape — in terms of the amount of losses relative to the size of the banks — than the ones that collapsed during the last big wave of failures, from the savings and loan crisis of the late 1980s/early 1990s.

The absence of problems in the middle of this decade was taken as proof that nothing very bad was likely to happen. Any bank that did not lower its lending standards from 2005 through mid-2007 would have stopped growing, simply because its competitors were offering more and more generous terms.

In Canada, the industry believes they have staved off disaster. So banks have returned to making loans with 0 down and 35% amortizations.

The New York Times article makes an interesting observation:

"Two years ago, when the subprime mortgage problems began to surface, Washington took great comfort from solid balance sheets, which regulators thought meant the banks could easily weather the problem."

"Last year, we learned that the regulators, like the bankers, did not comprehend the risks of some of the exotic instruments dreamed up by financial engineers. This year we are learning that the regulators, like the bankers, also failed to understand the risks of the generous loans that the banks were making in the middle of this decade."

Those in charge dramatically misread the situation.

If the economy does not restore itself quickly, and sales of US government debt push interest rates higher... then next year we will reading about the massive risks to our country posed by the huge number of loans made this year to first time buyers with little or nothing down and 35-year amortizations.

It won't be a pretty picture.

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US Banks

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BFF UPDATE: Bank Failure #77 - Union Bank, National Association, Gilbert, AZ
BFF UPDATE: Bank Failure #76 - Community Bank of Arizona, Phoenix, AZ
BFF UPDATE: Bank Failure #75 - Community Bank of Nevada, Las Vegas, NV
BFF UPDATE: Bank Failure #74 - Colonial Bank, Montgomery, Alabama
BANK FAILURE FRIDAY UPDATE: Bank Failure #73 - Dwelling House Savings and Loan Association, Pittsburgh, Pennsylvania

Well, it's Bank Failure Friday again. We follow the US banking system with keen interest because, as our Prime Minister said not too long ago, "there won't be an economic recovery until the U.S. financial system is repaired."

With that in mind, Bloomberg put out this story that "Toxic Loans Topping 5% May Push 150 Banks to Point of No Return".

Apparently more than 150 publicly traded U.S. lenders own nonperforming loans that equal 5% or more of their holdings, a level that former regulators say can wipe out a bank’s equity and threaten its survival.

Missed payments by consumers, builders and small businesses have pushed 72 banks into failure so far this year, the most since 1992.

More collapses may lie ahead as the recession causes increased defaults and swells the confidential U.S. list of “problem banks,” which stood at 305 in the first quarter.

Excluding the stress-test list, banks with nonperformers above 5% had combined deposits of $193 billion, according to the Bloomberg data. That’s almost 15 times the size of the FDIC’s deposit insurance fund.

The next six months could make this a very significant bank failure year.

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Economist: "China numbers are fake"... And Bank Failure Friday.

As faithful readers know, I have made several posts warning about the 'supposed' economic growth in China and have questioned the wisdon in pinning our hopes of economic recovery on China's growth.

Now noted economist Marc Faber, in his latest Gloom, Boom and Doom report, states that "China's economy is growing at 2%, not the 7.8% its government claims."

A growing number of investors turned bullish on China after its markets began to rise last March. But as we have noted here, China has been throwing massive amounts of stimulus money at it's economy.

As Faber notes, “if you throw money at the system, lots of things go up in value — but maybe they go up for the wrong reasons. What disturbs me today … is that the lows in March and late last year, sentiment was incredibly bearish about everything.”

Now, Faber observes, “there’s this incredibly bullish sentiment when insiders are actually selling and the technical picture of the market doesn’t look that great.”

China is in the midsts of a massive bubble buildup. Watch for a global impact when it bursts.

Bank Failure Friday

After seven failures last Friday in the United States, another five banks failed today brining the year's total to 69.

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Green Shoots?

On the day before Independence Day, a few more items from our neighbour to the South and a stunning item from Canada.

Yesterday's post triggered a number of disbelieving emails about this statement...

"And as bad as that is, the really bad news is that measuring unemployment the correct way (ie. the way it was done in the 1970s vs. the modified formula now used) shows that the US unemployment rate has actually shot past the 20% mark! One out of five Americans is unemployed."

It used to be that the figures told you the number of people who were truly out of a job. Now The official unemployment statistics only record the number of people who have recently lost their jobs. After a certain period of time, they are not considered 'unemployed'.

The 'official' US unemployment rate now stands at 9.4%.

But as I said, that figure does not reflect the total number of Americans who are truly out of a job. I don't have an online reference for you that 'over 20%' statistic, however I invite you to check out this op-ed column by Bob Herbert in the Saturday New York Times.

Herbert notes that for every job opening in the USA, there are more than five unemployed actively seeking work vying for those jobs. That is unprecedented and nearly double what we saw at the depths of the 2001 recession. The official ranks of the unemployed have doubled during this recession in the United States to 14 million and if you take into account all forms of labour market slack, the unofficial number is bordering on 30 million, another record.

Herbert cites the Center for Labour Market Studies at Northeastern University which estimates that the real unemployment now stands at 18.2%.

FYI, that is actually higher than the posted rate at the end of the 1930s - a time when they didn't play these 'rabbit-out-of-a-hat' games to lower the official unemployment statistics.

Bank Failure Friday

As faithful readers know, bank failures in the US always seemed to carried out on Friday afternoons. There have been so many regular failures week after week that Friday has jokingly come to be called 'Bank Failure Friday' in many economic blogs.

I have taken a break from posting the failures this past month (last post was on June 5th to report Bank Failure #37), but that doesn't mean the failures have stopped.

As of last week, the total number of Bank Failures in the US for 2009 was up to 45.

This week will see a cascade of failures, a record week for 2009. Perhaps it is because of the July 4th weekend, but the FDIC has jumped the gun and a wave of failures was announced yesterday.

Here's the damage for this week's tally so far:

Bank Failure #46: Rock River Bank, Oregon, Illinois
Bank Failure #47: First State Bank of Winchester, Winchester, Illinois
Bank Failure #48: John Warner Bank, Clinton, Illinois
Bank Failure #49: First National Bank of Danville, Danville, Illinois
Bank Failure #50: Elizabeth State Bank, Elizabeth, Illinois
Bank Failure #51: Millennium State Bank of Texas, Dallas, Texas
Bank Failure #52: PrivateBank and Trust Company, Chicago, Illinois

That's 7 and counting. We'll see if the total is run up some more as the day progresses.

Crushing Weight of Canadian Debt

You've already seen posts on this site about the worrisome levels of Canadian Household Debt, and now you will see those concerns come to fruition.

A new report from Equifax Canada says that more than half a million Canadians have fallen behind on their various credit payments, fuelling a 19% rise in the average national delinquency rate in the one-year period ending May 31, 2009.

The credit bureau called the double-digit jump "alarming" and notes much of the trouble stemms from missed payments on credit card bills and for sales finance purchases of items such as furniture and electronics. Equifax defines delinquent bills as those that are at least 90 days overdue.

The Equifax report is only the latest study to suggest that increasing numbers of Canadians are struggling to pay their bills.

Rising delinquencies in the areas identified by the Equifax Report are a portent of cascading debt problems. Consumers tend to miss payments on those unsecured credit products before they fail to pay back collateral-backed loans such as mortgages, bank loans and lines of credit.

We will see if the dominos continue to fall in that direction.

The Equifax data follows a Bank of Canada report last month that suggested climbing debt levels have put households under increased financial strain amid the recession. The BOC report also said that households are increasingly vulnerable to "adverse shocks" such as higher unemployment.

We look forward to the next round of Canadian employment figures.

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Bubbles and Bank Failure Friday

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BANK FAILURE FRIDAY UPDATE: Bank Failure #37 - Bank of Lincolnwood, Lincolnwood, Illinois

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As faithful readers know, bank failures in the US always seemed to carried out on Friday afternoons. There have been so many regular failures week after week that Friday has jokingly come to be called 'Bank Failure Friday' in many economic blogs. 2009 is off to a record breaking year with 36 failures so far. Updates in red/blue at the top of this post as they come in from the FDIC (click on blue portion to see press release from FDIC).

Meanwhile I have a great youtube clip for your viewing pleasure created by Chris Martenson (www.chrismartenson.com). It explains Bubbles and focusing on the housing bubble.




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Like sand through the hourglass...

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UPDATE: Bank Failure #36 - Citizens National Bank, Macomb, Illinois
UPDATE: Bank Failure #35 - Strategic Capital Bank, Champaign , Illinois
BANK FAILURE FRIDAY UPDATE: Bank Failure #34 - BankUnited, Coral Gables, Florida

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As I said yesterday, in the end it’s all about the economy.

For several weeks now pundits have been agog about the 'green shoots' indicating a recovery may be at hand.

Balderdash.

While it is true that the markets have recovered over 30% from last year’s lows, something just doesn't add up.

First quarter corporate earnings are down over 30% and there is a serious disconnect between stock prices and economic reality - just like in late 2007. Those plunging headlong back into the market seem to think that the 50% sell-off in 2008 was overdone and great bargains are now available.

I believe those investors simply do not understand the economic maelstrom of last October.

As I have said over and over, the crash of 2008 was a once in a multi-generational event borne of systemic problems in the economy.

Economists like Peter Schiff have succinctly identified the issue and we have profiled them on this site. The North American economy must allow dead industries to die and permit the natural restructuring of capital and manpower that will rebuild the economy.

But government is interfering. Like an addled heroin addict who cannot break free of his drug addiction, our governments continue to indulge in the traditional vices of over-borrowing and over-spending. Wherever the private sector attempts to correct its behavior, a bloated federal government overrides its efforts.

Faced with a meltdown of the banking system. World governments injected trillions of dollars into their economies and changed accounting rules to ensure that a systemic banking failure was averted. Though the system has stabilized, investors seem to forget that none of the fundamental problems have been solved. We may have survived the initial catastrophe, but the system remains wrought with faults.

By diverting trillions of borrowed dollars into keeping alive vegetative corporations such as AIG, Chrysler, Big Banks and GM, our governments are preventing new enterprises from access to vital labor and capital resources. We are enshrining inefficiency.

North America needs fundamental restructuring in order to compete in an increasingly competitive marketplace. Meanwhile, profitability in those countries that do the hard work of restructuring can be expected to rise disproportionately as the world economy revives.

The news wires are already a tither about another avalanche of loan defaults and derivative failures that are coming down the pike, sham “stress tests” notwithstanding. The "stress-tests" will prove to be nothing more than a confidence-boosting whitewash of the massive problems confronting the banking industry.

As corporate earnings fail to keep pace with the blistering ascent of stock prices, look for investors to bail on the market as they did in late 2008.

Only this time the damage will be even more severe.

After the crash of 2008, investors fled to the safe havens of the U.S. dollar and U.S. government debt.

It won't happen that way next time.

China, the world’s largest gold producer, has recently doubled its central bank’s gold reserve. China also floated a preliminary idea at the recent G-20 meetings to replace the U.S. dollar with a gold-linked international reserve currency. This idea may soon catch on among creditor nations who value real money but also want the flexibility to undervalue their paper currency for the benefit of exporters.

Russia, in a news story announced yesterday, has moved away from using the US dollar as its basic reserve currency (see story here)

At the beginning of the 20th century, the U.S. dollar became the world’s reserve currency because, at the time, it was “as good as gold.” Now the world’s largest debtor nation will suddenly confront the true weight of its obligations and be forced to significantly lower its standard of living.

We are nearing the crest of some serious (and tumultuous) times. And the markets are starting to sense it.

Earlier this month, the U.S. reported the first budget deficit for April in 26 years, with spending exceeding revenue by $20.9 billion, even though that’s the month when taxpayers have to stump up to the Internal Revenue Service and the government’s coffers should be overflowing.

So far this fiscal year, the U.S. shortfall is $802.3 billion, more than five times the $153.5 billion gap in the year-earlier period.

For the fiscal year ending Sept. 30, the Congressional Budget Office forecasts a record deficit of $1.75 trillion, almost four times the previous year’s $454.8 billion shortfall and about 13 percent of gross domestic product. Bear in mind that the target demanded of European nations wanting to join the euro was a deficit no greater than 3 percent of GDP.

Meanwhile Chinese exports are dropping as the global economy weakens, with overseas shipments declining 23% in April from a year earlier. This leaves China (a nation that has already expressed concern about its U.S. investments) with less to spend on supporting that debt in the future.

This is not going to end well.

And Real Estate will be but one of the massive casualties.

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Bank Failure Friday, More Inflation fears and Hockey Trivia

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UPDATE: Bank Failure #33: Westsound Bank, Bremerton, Washington.

UPDATE: No failures yet, but FDIC so busy they will open temporary East Coast Satellite Office to help close banks.

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Well... it's the day after the results for the infamous US Bank Stress Tests has been released. Will it also be Bank Failure Friday as well?

As faithful readers know, bank failures in the US always seemed to be delayed until late on Friday afternoons, and there have been so many regular failures week after week that Friday has jokingly come to be called 'Bank Failure Friday' in many economic blogs.

2009 is off to a record breaking year with 32 failures so far. Updates in red/blue at the top of this post as they come in from the FDIC (click on blue portion to see press release from FDIC).

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INFLATION FEARS

Bond market watchers are all a tither. Check out this chart (click on image to enlarge)

This is the intraday chart on the long bond futures. For those who follow such things, this is one nasty chart. The dramatic line going straight down represents the drop in demand for US bonds. As a resuIt the yield (interest rate paid on those bonds) had to spike upward in order to sell the bonds. The US government just sold $14 billion of long bonds at a whopping 4.288% yield. That was far above pre-auction forecasts for a yield of 4.192%, according to Bloomberg.

This prompted China to issue its clearest warning to date about worldwide inflation.

"As more and more economies are adopting unconventional monetary policies, such as quantitative easing (QE), major currencies' devaluation risks may rise," the People's Central Bank of China said in its quarterly report.. The bank fears a "big consolidation" in the bond markets, clearly anxious that interest yields will surge as western states try to exit their QE experiment.

Simon Derrick, currency chief at the Bank of New York Mellon, said the report is the latest sign that China is losing patience with the US and aims to diversify part its $1.95 trillion (£1.3 trillion) foreign reserves away from US Treasuries and other dollar securities.

This has a tremendous potential to impact our economy and the real estate market so we will explore this in the coming week.

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HOCKEY TRIVIA

Meanwhile the Village on the Edge of the Rainforest Canucks let one slip away from them last night. Series is tied 2-2 instead of the Canucks being up 3-1.

Therefore two hockey trivia questions for you today in symmetry with the 2-2 series deadlock.

Who has his name on the Stanley Cup the most times AS A PLAYER (11 times)? Click here for the answer.

Now... who has his name on the Stanley Cup the most times (10 as a player, 7 as a club executive, total 17 times)? Click here for the answer.

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Email: village_whisperer@live.ca

Bank Failure Friday & Hockey Trivia

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UPDATE: Bank Failure #32 - America West Bank, Layton, Utah
UPDATE: Bank Failure #31 - Citizens Community Bank, Ridgewood, New Jersey
UPDATE: Bank Failure #30 - Silverton Bank, National Association, Atlanta, Georgia
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Well... another week, another Bank Failure Friday. Updates in red/blue at the top as they come in from the FDIC (click on blue portion to see press release from FDIC).

While we wait, I have another hockey trivia tidbit to stump friends and collegues while watching our beloved Village on the Edge of the Rainforest Canucks take on the Chicago Black Hawks in round 2 of the playoffs.

As you already know, Lord Stanley of Preston (then Governor General of the Dominion of Canada) donated a trophy in 1892 to be awarded to the Dominion's champion hockey team.

The Dominion Hockey Challenge Cup (aka the 'Stanley Cup') is now awarded each year to the NHL champion, the best men's hockey team in the world.

But did you know that another Governor General donated a trophy to be awarded to the Canadian national women's hockey champion each year?

Today's trivia question... The Stanley Cup is the trophy that was donated by the Governor General of Canada to the best mens hockey team. What is the name of the trophy, also donated by a Governor General, awarded to the best women's hockey team in Canada?

Answer: In 2006 the Clarkson Cup (pictured above) was donated by Governor General Adrienne Clarkson to be awarded to the National Canadian Women's Hockey Champion.

Most people know the men's championship trophy. Few know the women's championship trophy. Should be good for a pint or two over the weekend.

Cheers!

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Email: village_whisperer@live.ca

Bank Failure Friday and the 'real' name of the Stanley Cup

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UPDATE: Bankd Failure #29 - First Bank of Idaho, Fsb, Ketchum, Idaho

UPDATE: Bank Failure #28 - First Bank of Beverly Hills, Calabasas, California

UPDATE: Bank Failure #27 - Michigan Heritage Bank, Farmington Hills

UPDATE: Bank Failure #26 - American Southern Bank, Kennesaw, Georgia

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Not too long ago our Prime Minister said, "there won't be an economic recovery until the U.S. financial system is repaired." So we dutifully scrutinize US banking developments with keen interest.

As faithful readers of this blog know, bank failures in the United States always seemed to be delayed until late on Friday afternoons. This has prompted many blogs to jokingly refer to fridays as 'Bank Failure Friday'.

So far 2009 is off to a record breaking year with 25 failures to date.

We wait with eager anticipation for today's carnage. Updates from the FDIC as they come in. We will post them in red as updates at the top of the post.

Meanwhile you will have noticed the 'Canuck Stanley Cup Countdown' which now occupies the upper right corner of the blog. The Village on the Edge of the Rainforest erupted into ecstatic joy last Tuesday as the hometown Canucks eliminated the Saint Louis Blues 4 games to 0. The Canucks are now through round 1 and patiently await their next opponent.

With the hockey theme in mind, I offer faithful readers a bit of hockey trivia you can stump your friends with.

The holy grail of hockey is the Stanley Cup. But did you know that 'Stanley Cup' is a nickname for the silver chalice?

T'is true.

Nowhere on the famous trophy do the words 'Stanley Cup' appear. Hockey's ultimate prize was donated by Lord Stanley, Earl of Preston, when he was Govenor General of the Dominion of Canada - and he did not name the Cup after himself. Instead he gave the trophy it's own unique name which is engraved on it for all to see.

If you look on the famous silver rose bowl you will find the actual name of the Cup. Click on the image below to read it for yourself.

And raise a pint for the Whisperer when you win the bar bet on this timely Canadiana trivia question.

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Email: village_whisperer@live.ca

Inflation: The Case Against It

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Bank Failure Friday Update: 3 Bank Failures and 2 Credit Union Failures (see bottom of post)

As faithful readers already know, Garth Turner is the author of After the Crash, web blogger at Greater Fool and one of the early Canadian soothsayers who acurately predicted the downturn in Canadian Real Estate.

He steadfastly stood up against critics and warned Canadians about the real estate crash and how it would spread to Canada.

So I asked Garth. What does he think about my concerns of inpending inflation worries?

"Not a credible position", he told me matter-of-factly.

"We are trying to escape the jaws of deflation. There will be no threatening inflation and no rate increses in 2010."

Garth elaborated yesterday on his blog. He thinks the market reaction to Bernanke's decision to dump another $1 Trillion dollars is the manic over-reaction of bullionist's who don't understand the process.

While we may teeter on the cusp of Depression, Garth says that Governments will spend whatever it takes to stave it off, borrowing massive wealth from the future disregarding how the Boomers and their kids in the process. Interest rates will continue to race to zero and stay there.

"GDP will likely be rising marginally a year from now, but that does not mean ugly days will be passing. Far from it. Recession in the real economy – where we work, buy houses and shop – will last for several years. Real estate prices will be lower at Christmas than they are now, will stabilize in 2010, and then flatline for years after that. Jobs will start to reappear by next Spring, but they will come back in dozens after being lost in hundreds and thousands."

"Most significantly, however, is the certainty that what governments are doing to stave off depression will only cause another problem of equal size in the future. And, no, I am not talking about hyper-inflation in a year or two because of the new American trillions. Instead, we are guaranteeing a future of higher taxes, debt-shackled governments, a far less competitive North America and the end of the US empire."

Turner summarizes the bullionist's position as opportunists who are betting that the US Federal Reserve (and other central banks, like the Bank of Canada and the European Central Bank) will buy up government securities and create a honking big pot of money to scare off the deflation demons. The bullionist's, Garth says, are convinced we are just months away from the collapse of paper money as crazed central banks overdose on creating cash.

"Under their scenario, hard assets inflate wildly as paper money deflates. The US dollar collapses, causing the likely demise of major banks. In this world, smart wealth rushes into the only global currency alternative – bullion – sending it skyward, as the rest of us use hundred-dollar bills to buy bread and watch as our life savings are destroyed in a matter of months. Others see real estate, oil, two-by-fours and chickens soaring in value. As that happens, debt fixed in dollars fades as fast as your RRSP, which means mortgages slip away into nothingness, at the same time as interest rates hit 20% or 40% or higher."

And then Garth Turner dismisses the argument. He says, "this is exactly why it ain’t gonna happen. No depression. No hyper-inflation. Both are toxic to human society and would inflict irreparable damage. There is not a sane government in the world (sorry. Zimbabwe) which will allow either to take place. If we tip either way, it will be totally by accident."

Impressive argument. But it begs the question... would any sane goverment have allowed the current crisis situation we find ourselves in, to have taken place to begin with?

Yet it happened and all government can do is react.

As we wait on the FDIC to give us our Bank Failure Friday fix, I invite you to check another oracle who predicted not only the 2006 subprime mortgage disaster in the United States, but also predicted the 2008 stock market crash.

His name is Peter Schiff and he started making the real estate predictions in 2002. Check out this compilation of his interviews on the major American business networks. Co-panelists openly laugh at him, audibly scoffing and gasping at his claims about pending real estate and stock market crashes.

He holds a viewpoint on inflation that is diametrically opposed to that of Garth Turner.

Schiff is adament that rapid inflation will happen and it won't be by accident, leaving govement nothing to do but react.

His views tomorrow.

Bank Failure Friday

Bank Failure #18: FirstCity Bank, Stockbridge, Georgia

From the FDIC: The Federal Deposit Insurance Corporation (FDIC) approved the payout of the insured deposits of FirstCity Bank, Stockbridge, Georgia. The bank was closed today by the Georgia Department of Banking and Finance, which appointed the FDIC as receiver.

The FDIC estimates the cost of the failure to its Deposit Insurance Fund to be approximately $100 million. FirstCity Bank is the eighteenth FDIC-insured institution to fail this year. The last bank to fail in Georgia was Freedom Bank of Georgia, Commerce, on March 6, 2009.

Bank Failure #19: Teambank, National Association, Paola, Kansas

From the FDIC:Teambank, National Association, Paola, Kansas, was closed today by the Office of the Comptroller of the Currency, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Great Southern Bank, Springfield, Missouri, to assume all of the deposits of Teambank.

The FDIC estimates that the cost to the Deposit Insurance Fund will be $98 million. Great Southern Bank's acquisition of all the deposits was the "least costly" resolution for the FDIC's Deposit Insurance Fund compared to alternatives. Teambank is the twentieth FDIC-insured institution to fail in the nation this year and the first in the state. The last FDIC-insured institution closed in Kansas was The Columbian Bank and Trust Company, Topeka, on August 22, 2008.

Bank Failure #20: Colorado National Bank, Colorado Springs, Colorado

From the FDIC: Colorado National Bank, Colorado Springs, Colorado, was closed today by the Office of the Comptroller of the Currency, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Herring Bank, Amarillo, Texas, to assume all of the deposits of Colorado National.

The FDIC estimates that the cost to the Deposit Insurance Fund will be $9 million. Herring Bank's acquisition of all the deposits was the "least costly" resolution for the FDIC's Deposit Insurance Fund compared to alternatives. Colorado National is the nineteenth FDIC-insured institution to fail in the nation this year and the first in the state. The last FDIC-insured institution closed in Colorado was BestBank, Boulder, on July 23, 1998.

Credit Unions

In addition to the three bank failures, two large Corporate Credit Unions were seized today by the National Credit Union Administration (NCUA): U.S. Central and WesCorp. These two credit unions had a combined $57 billion in assets. The affected institutions don't serve the general public. They provide critical financing, check clearing and other tasks for the retail institutions. These wholesale credit unions, known in industry parlance as corporate credit unions, are owned by their retail credit-union members.

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Email: village_whisperer@live.ca

R/E Ethics, the Economy and Bank Failure Friday!

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UPDATE: No word from the FDIC @ 7:15 pm PDT. Just doesn't feel like Friday.

Ahhh... another Friday and faithful readers are tuning in for the latest on Bank Failure Friday.

Before we get to that, let's touch on a few other things.

Real Estate Ethics

Recall last week (March 5th) we talked about the latest tactic of the Real Estate Industry to target first time home buyers. A campaign was launched insinuating that "other young couples are buying, you should too!"

Round Two of that campaign hit the streets this week. Simultaneous articles appeared all across the country. In Vancouver, the Sun’s headline was, “First-time buyers driving market,” in Calgary it was the Calgary Herald, “Entry-level buyers now driving Calgary’s home sales, report says".

Garth Turner beat me to this and you can read more about it here. Turner takes a look at the so called 'report' and notes "there is no data, no numbers, no proof, no confirmation. Just another real estate marketing gimmick – a 'report' which 'confirms new buyers are driving real estate' in almost every major centre in Canada." Turner concludes its nothing more than a fabrication of facts that amounts to a conspiracy of misinformation, unintentional or not.

It's hard to disagree.

The Economy

As we have written this week, the United States has taken huge steps to offset the collapse in asset values and bank balance sheets by buying up bad investments, stocks and debt. This is being done by printing money like it's going out of style.

Two weeks ago Britain decided to embark on the same course. Last week the Bank of Canada joined the printing press parade. And yesterday it came to light that three other countries climbed on board the ever-expanding currency producing wagon. Japan, China and Switzerland.

Market insiders say this confirms all the fears about the coming onslaught of hyper-inflation. The latest three day rally on Wall and Bay Streets saw not only stocks rise dramatically, but gold/silver/oil and mineral commodities too.

This (the rise of both stocks and gold/silver/oil) insiders say points to a bottoming out of the worst Bear market since the Great Depression and the start of the predicted hyper-inflationary period.

If they're right, buckle up folks, it means things are gonna take off like a rocket if that is the case. It's not the end of the recession or hard times in Canada, but the market is usually six to eight months ahead of the economy.

My recommendation? Now's the time to play the market. Silver stocks like First Majestic, commodities like Tech Resources, oil stocks. But beware! A rapid blowing up of the market could lead to another rapid collapse. Study the 1930s! The market recovered almost 60% after the crash of 1929. All the stimulus that has been announced will find it's way into the market - mark my words. But beware the rebound back down.

Bank Failure Friday

As our Prime Minister said, "there won't be a recovery until the U.S. financial system is repaired." So we watch the US banking developments with keen interest. And what a week it has been.

The FDIC went to Congress to ask for up to $500 Billion in extra funds to deal with failing US Banks. The FDIC is funded by insurance premiums levied against all US Banks. Those premiums are used to bail out bad banks. Well it turns out those running things believed their fund was so well-capitalized - and that bank failures were so infrequent - that there was no need to collect the insurance premiums from 1996 to 2006.

Ya gotta love it.

While we wait for today's carnage, take the time to check out this '60 Minutes' segment that follows the FDIC when they take over a failing bank on Bank Failure Friday. From the into...

"Most every Friday now the FDIC is seizing several banks. You haven't seen these takeovers happening because they're done secretly, at night, to make sure that there's no needless panic by depositors. But last week we were given extraordinary access to one of these operations... "

Another whirlwind week ends with 'Irrational Fear'? It's Bank Failure Friday and... a priceless youtube clip.

Laurel Magri: lying, deceptive, manipulative whore.
UPDATE: Bank Failure #17: Freedom Bank of Georgia, Commerce, Georgia (the weekend can officially begin now)

The day after the DOW plunges to fresh 12-year lows we reflect on quite a week.

The grim news reads like a police blotter: GM said its survival is in doubt, bank shares took a beating, Citigroup fell below a buck and China defied expectations by failing to boost its economic stimulus program (and that's just yesterday's news).

Meanwhile layoffs were the story of the week. Adding to the list yesterday was the Toronto Star, the biggest Canadian daily, who issued pink slips to 60 employees, all from sales and marketing. 3,400 Canadians have now lost their jobs over the past four days.

Bank of Canada deputy governor Pierre Duguay came out and warned Canadians not to be spooked by "irrational fear" over the economy but then goes on to tell the House of Commons finance committee that "there will be more bad economic news coming".

[Remember that if you are laid off. You can meet with your bank manager after failing to make three consecutive mortage payments and say, "hey, chill dude... don't be spooked by irrational fear, man"]

But it's Friday so let's turn our attention to our neighbours to the south as we keenly await the carnage from Bank Failure Friday.

As faithful readers know, bank failures in the US always seemed to be delayed until late on Friday afternoons, prompting Friday to be renamed 'Bank Failure Friday' by many economic blogs.

And it appears it might be a banner year of Friday's.

The Wall Street Journal reports that the Senate Banking Commission wants to give the FDIC $500 Billion from the Treasury Department Seems the FDIC's deposit-insurance fund has fallen precipitously with 25 bank failures last year and 16 so far in 2009. Loading up for the coming barrage, perhaps?

Maybe the Commission caught American CoreLogic's just released report on households with negative equity. They report 8.3 million US mortgage holders are underwater. Many analysts expect that the number of households with negative equity could rise to 17 to 23 million by the end of 2010. That means more US homes foreclosed, more US banks failing, and more bad economic news for America's largest trading partner: Canada.

Updates from the FDIC as they come in, check back late this afternoon.

In the meantime you may recall the rant from Rick Santelli that we posted on February 19th. Santelli is a former derivaties trader who reports for CNBC from the Chicago Mercantile Exchange. On Feb. 19th, Santelli took issue with President Obama's plan to bailout homeowners.

This provided quite the backlash since Santelli, as former derivatives trader, embodies the Wall Street wormhole into which much of the bailout money has gone.

In response, Jon Stewart eviscerates CNBC and Santelli in this soon-to-be-classic 8 minute clip.

It's worth the time to check it out while we wait for the FDIC.



Bank Failure #17

From the FDIC: Northeast Georgia Bank, Lavonia, Georgia, Acquires All of the Deposits of Freedom Bank of Georgia, Commerce, Georgia

Freedom Bank of Georgia, Commerce, Georgia, was closed today by the Georgia Department of Banking and Finance, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Northeast Georgia Bank, Lavonia, Georgia, to assume all of the deposits of Freedom Bank of Georgia.

The FDIC estimates that the cost to the Deposit Insurance Fund will be $36.2 million. Freedom Bank of Georgia is the seventeenth FDIC-insured institution to fail in the nation this year. The last bank to fail in Georgia was FirstBank Financial Services, McDonough, on February 6, 2009.

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Email: village_whisperer@live.ca

Bank Failure Friday (2009/02/27)

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UPDATE: Bank Failures #15 & #16 added.

Has it been a week already?

As faithful readers know, bank failures in the US always seemed to be delayed until late on Friday afternoons, prompting Friday to be jokingly referred to as 'Bank Failure Friday' in many economic blogs.

2009 is off to a record breaking year with 14 failures so far.

Mind you... for a while it looked like last Friday might slip by without one. Will that be the case today?

We wait with eager anticipation for today's carnage. Updates from the FDIC as they come in, check back late this afternoon. Click here to read our post: "US Bank Failures - Why Do We Care".

In the meantime, an interesting youtube clip in which Fox News Commentator Glenn Beck goes over the history of housing prices and makes the case that President Obama's plans to stem the collapsing housing market in the US may be doomed from the start. His statistics suggest the collapse - to date - may not have even reached the mid-way point.

Interesting.



Bank Failure #15

From the FDIC: MB Financial Bank, N.A., Chicago, Illinois, Assumes All of the Deposits of Heritage Community Bank, Glenwood, Illinois.

Heritage Community Bank, Glenwood, Illinois, was closed today by the Illinois Department of Financial Professional Regulation, Division of Banking, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver.

The FDIC estimates that the cost to the Deposit Insurance Fund will be $41.6 million. MB Financial Bank's acquisition of all the deposits was the "least costly" resolution for the FDIC's Deposit Insurance Fund compared to alternatives. Heritage Community Bank is the fifteenth FDIC-insured institution to fail in the nation this year and the third in the state.

Bank Failure #16:

From the FDIC: Bank of Nevada, Las Vegas, Nevada Assumes All of the Deposits of Security Savings Bank, Henderson, Nevada

Security Savings Bank, Henderson, Nevada was closed today by the Nevada Financial Institutions Division, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver.

The FDIC estimates that the cost to the Deposit Insurance Fund will be $59.1 million. The Bank of Nevada's acquisition of all the deposits of Security Saving Bank was the "least costly" resolution for the FDIC's Deposit Insurance Fund compared to alternatives. Security Savings Bank is the sixteenth bank to fail in the nation this year.


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A Financial Benchmark with the DOW; Can Cameron Read?; and... don't forget... it's 'Bank Failure Friday'

UPDATE: Bank Failure #14: Silver Falls Bank, Silverton, Orgeon (details below)

UPDATE: 6:00pm EDT and no word from the FDIC - a week without a failure perhaps?

UPDATE: DOW rallies after dropping to 7,257.75. Closes down only -100.28 at 7,365.67

Another week goes by and we watch developments in the economy with keen interest.

Yesterday the DOW closed at 7,465.95, a six year low.

In 2002, the lowest level that the Dow hit was 7,286.27.

If the market breaks down below that 2002 level, the DOW will have fallen back to 1997 levels, making it a lost decade for DOW investors (not counting dividends).

It brings to mind former US Federal Reserve Board Chairman Alan Greenspan's speech of December 5, 1996. Speaking to the American Enterprise Institute during the stock market boom of the 1990s, Greenspan made his infamous 'irrational exuberance' comment.

“ [...] Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade? [...] ”

The phrase was interpreted by financial pundits as a typically cryptic warning that the market might be overvalued.

And where was the DOW on December 5, 1996? It closed that day at 6,437.

Twelve years later the market may well be on it's way to wiping out those years of 'irrational exuberance' and all the years that came afterwards.

If it does, is a DOW of 5,000 out of the question?

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Can Cameron Read?

Two days ago we profiled BCREA's Chief Economist Cameron Muir's incredulous statements that now is a great time to buy real estate in Vancouver.

I wonder if Cameron read the front page of Wednesday's Washington Post newspaper?

"Markets around the world plunged Tuesday as evidence mounted that the global economic crisis is worsening. Japan is suffering it's worse downturn in 35 years. The British economy is facing it's sharpest decline in 30 years. Germany is slumping at it's worse pace in 20 years. Meanwhile the job market in the United States, at the epic-centre of the world downturn, is at it's worse in decades. And emerging economies are contracting at a pace few had predicted just months ago. Even China, whose economy is still growing at 6.8% annual pace is grappling and grasping with vast numbers of the unemployed, raising fears of unrest. The sharpness of the global showdown has alarmed economists who see no obvious engine for recovery. Most Western developed economies are going to see the deepest downturn they have seen in a number of decades, in some cases, possibly, since the Second World War."

Last night, while talking to Professor Nouriel Roubini, Mark Zandi chief economist for economy.com, and Fred Mishkin (ex-Fed Governor, Professor Columbia University), Charlie Rose called it 'scary stuff'.

Yet Cameron Muir calls it a great time to buy.

Okie Dokie!

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Bank Failure Friday

As faithful readers know, we start off Friday's watching to see if it is once again Bank Failure Friday.

Bank failures in the US always seemed to be delayed until late on Friday afternoons, prompting Friday to be jokingly referred to as 'Bank Failure Friday' in many economic blogs.

2009 is off to a record breaking year with four more failures last Friday. That brings the year's total to 13.

(In 2008, 25 banks failed. In 2007, three failed. None failed in 2005 or 2006.)

We wait with eager anticipation for today's carnage... updates as they come in, check back late this afternoon.

Click here for our previous post: "US Bank Failures - Why We Care".


Bank Failure #14: Silver Falls Bank, Silverton, Oregon

From the FDIC: Citizens Bank, Corvallis, Oregon, Assumes All of the Deposits of Silver Falls Bank, Silverton, Oregon

Silver Falls Bank, Silverton, Oregon, was closed today by the Oregon Department of Consumer and Business Services, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Citizens Bank, Corvallis, Oregon, to assume all of the deposits of Silver Falls Bank.

The FDIC estimates that the cost to the Deposit Insurance Fund will be $50 million. The Citizens Bank acquisition of all the deposits of Silver Falls Bank was the "least costly" resolution for the FDIC's Deposit Insurance Fund compared to alternatives. Silver Falls Bank is the fourteenth bank to fail in the nation this year. The last bank to fail in Oregon was Pinnacle Bank, Beaverton, on February 13, 2009.


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