Geithner's Plan Shreds the Next Layer of "Mark to Fantasy" - Look for Further Bank Writedowns - or Bankruptcies!

25 March 2009

I'm still busy while travelling.

However, I came across this interesting piece by Henry Blodget, referenced on Jim Sinclair's website.

What Mr. Blodget points out very succinctly is that the next stage of taxpayer-funded government bailouts of the financial industry will be a great boon to the banks - if you are concerned about the real value of their assets, as Mr. Geithner is.

The problem is that the bank's books are shrouded in level upon level of fantasy. While Mr. Geithner's plan may potentially aid the banks - in terms of their real asset value - it removes their next layer of protective camouflage - and that could send them into Chapter 11, as the actual situation of the banks remains more problematic than has even yet been revealed.

What is the next layer of fantasy to be uncovered?

Banks are permitted to declare investments that they do not intend to sell as having asset values equivalent to their face value. Thus, the banks can declare these so-called assets at the prices at which they were originally written until forced to sell them at their maturity dates - at which time it is well known that the market will prove them to be of lesser worth.

Under the new Geithner plan, the banks could now be forced - through stress testing or through regulatory compulsion - to begin marking these "hold to maturity" assets at their real market value - that is - at values much lower than those now on the books.

Uh oh! This is a major tear in the fabric of the years of "mark to fantasy" bookkeeping that have sustained the US banks (and their allied international brethren) in the "pretend game" of being profitable up until the present time. (Note that this game also allowed the banks to play the quite fun game of awarding hundreds of millions of dollars in bonuses to senior staff, etc.)

When the banks tell us that their books are sound, it is this next layer of fantasy on which these seemingly reassuring statements are made.

Legally, the banks have been able to make this claim --- until now, But Mr. Geithner's plan has the potential to explode this loophole.

The implication?

According to Mr. Blodget, there is "one small problem with Geithner's plan - it will bankrupt the banks!"

The following chart (see Mr. Blodget's article below) illustrates clearly the historically unprecedented debt levels of US consumers at present. Why is this important? The chart reaffirms that we are presently dealing with a debt crisis, not a liquidity crisis:

Read all about it here.

For the avid reader - additional links on the PPIP (Public-Private Investment Partnership):

• Dr. Housing Bubble.
• Finance Trends Matter.
• Geithner's Five Big Misconceptions (Blodget).
• Table summarizing high levels at which banks mark their toxic assets (when permissible).
• The "Ridiculous Marks" of Toxic Assets.
  

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The Kenora March Palette: 2009

15 March 2009

I began to publish the Kenora Palette Series in March 2008.

March is a magical time of year in Northwest Ontario, though you have to wander the back country trails to appreciate the beauty of our region in its fullest flourish. The magic is not usually visible from the highways, as it is too subtle and delicate to be captured by this method.

We are travelling out of town for several weeks at the end of this week, so I selected today as the last opportunity to capture the waning winter magic of our surrounding trail system.

Most of today's photos were taken on a network of local trails which Susan and her friend Linda Moncrief helped to clear, beginning this time of year in 2008.

What creates the magic of the Kenora March Palette? Certainly the gently receding blanket of winter snow is a key ingredient, but there is more. Another required component is the evening sun - now venturing further north - which highlights the subtle and always muted tones of bare trees and stark granite against the crystal white layerings of now soft and gradually disappearing snow.

The temperatures this time of year can be quite variable. One day will see -28 degrees Celsius, and the next will register -4 degrees Celsius. The, out of nowhere, as has occurred the past two days, the temperatures will jump well above zero, and the crystalline fabric of winter will recede so rapidly as almost to disintegrate.

Come with me now for an evening walk along the winter trails northwest of Kenora.

The following photo illustrates well the principle of the subtle glint of light illuminating the diffusely pigmented surface of the birch in the darkening forest.

The following closeup of the same tree makes clearer still the ephemeral nature of the evening light as it yields to the darkness that until recently has ruled and dominated our landscape, challenged only by the fleeting dash of the winter sun across the southern horizon.

Occasionally our pathway is framed by fallen trees or other markers offered by nature. This particular fallen red pine, almost exactly horizontal, is my favourite of them all, though the opening created is somewhat lower than head height.

A glimpse to the side almost anywhere along the trail will reveal the irregularities of the natural world softened by thick blankets of downy northern snow. These views are almost always pleasing, despite their ubiquity.

Here is another similar view, though at an entirely different location along the trail system.

I also enjoy the delicate textures created by contrasting elements on a much smaller scale, in this case a balsam branch fallen into the snow cover on the trail.

It would be neglectful, of course, not to illustrate the trail itself. This is a typical view.

This large granite boulder, left behind by retreating glaciers, remains a favourite landmark of Susan's and mine.

There are complex, fractal, infinitely complex textures overhead in addition to those layering the forest floor.

I am also drawn to simple images, though even a single birch against the snow is not as simple as it at first appears.

From simplicity to complexity... again. Note that the tongues of snow cover are clearly giving way to the resurgent forest.

Though following rules which remain fully submitted to randomness, the following image of a young grove of birch trees certainly offers the illusion of order and deliberateness.

I entered this image not for the composition of its visual elements, but for its almost flawless representation of the full palette of March, though the fresher tones of green are not so obvious here.

This naturally occurring arbour is just as intimate and nurturing in life as it appears in the image below.

Another image which captures the palette of March almost perfectly.

And here are some of the umbers and greens which were neglected in previous palette photos.

The trail itself, traversed by dogsled more than by motorized vehicle.

The bare forest against the sky.

Here is the perfect photo to close our review of the current March Palette series. The vapour trails of the technological world remind us that the sphere of the natural world is finite in scope. However, there is more to explore here near our home than we can exhaust in the time available to us. Wilderness, though often intersected by the marks and scratchings of men and machines, seems here still to stretch without end in every direction.

Thank you for joining me again for this review of the palette of Kenora (Northwest Ontario) in March 2009.

The Kenora palette series:

The Kenora March Palette: 2009

The Kenora Palette: After the June Rain

The Kenora May Palette Erupts into Green Tones, but also into Unexpected Hues

The Kenora Palette in May

The Kenora March Palette
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Swiss Franc Alert

12 March 2009

I note that I continue to receive many visitors who are searching for information about the Swiss Franc, a currency I have generally held in high regard. However, there is bad news for the Swiss Franc today - though keep in mind that this is in large part because the currency remains fundamentally very strong!

Bill Fleckenstein made this comment today:

"However, the really big news emanated from the Swiss National Bank, which not only trimmed rates but said they intend to buy currencies to avoid franc appreciation. Said differently, they want to trash their currency. And, they wasted no time -- by actually entering the market to effect that trade. (Within hours, the Swiss franc was lower by about 4%.)

"So, anyone with money in Switzerland as a safe haven has to be a little bit concerned, as the Swiss are definitely playing the game of let's-debase-our-currency-to-the-bottom. In any case, the NZ/Swiss news helped gold and silver, which were up 1.5% apiece."

Why is the Swiss government seeking to pull the floor out from underneath its own currency? Exports represent over 50% of the previously thriving Swiss economy. The Swiss government anticipates a contraction in GDP this year on the order of 2.5-3%. The strong Swiss franc made Swiss exports too expensive to sell and made Switzerland itself too expensive for many tourists to visit -- dealing blows to two major sectors of the Swiss economy. Estimates for the decline in Swiss watch exports are now down from -10% to -14%. Swiss luxury goods maker Richemont missed third quarter forecasts, marking its most challenging quarter in over two decades. For more information, click here or here.

I have commented previously that in a financial crisis, gold is a better choice than the Swiss Franc. I continue to hold to this position. See my previous blog entry: "Gold Is Better Than the Swiss Franc."

Here is a list of my blog entries concerning the Swiss Franc:

1. Canadians, Buy the Swiss Franc Now!

2. The Swiss Franc Continues To Climb in Canadian Dollars.

3. My first compliment from Fleck.

4. Currencies 101.

5. Another Swiss Franc Buying Opportunity for Canadians.

6. All You Need To Know About Global Money Supply in One Place.

7. The Swiss Franc Is Still Strong.

8. Use "FXF" (CurrencyShares Swiss Franc Trust) To Buy the Swiss Franc.

9. Gold is Better Than the Swiss Franc.

10. Swiss Franc Alert.

11. Gold Isn't Gaining All That Much... In Canadian Dollars!
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A Letter to a Friend

5 March 2009

I have mentioned before that this is a very busy time of year in my work schedule, so I have had little time to blog. However, I wrote a letter to a friend today that sums up my views of where and how to invest in 2009.

As I don't have much time to say more, I'll just print the letter below in its original form:

Well, I've been right about gold since 2003, when I began investing in that sector.

However, I was not expecting gold mining stocks to fall with everything else as they did last year. That was a big setback for us.

Gold has climbed from the $250 range to its present $900-1000 range during that period, and can easily go much higher.

The problem with the miners is that their production costs have been rising quite a lot, and they have to access large amounts of capital, so they are vulnerable to the credit freeze also.

That being said, gold stocks have well outperformed other sectors this year, and if gold keeps climbing, the gold stocks could do very well. For example, gold stocks outperformed during the great depression, even though gold ownership was outlawed.

The reason gold is a good investment is that governments around the world are literally printing money to bail out everything. That makes money worth less, and gold worth more. For example, at the turn of the millennium, there were about $4 trillion US dollars in circulation. That figure has now gone to $15 trillion. The US government now owes about $30 trillion, and it is more bankrupt than General Motors – only high inflation will make current government debts payable.

I follow an advisor named John Doody who identifies the gold stocks he thinks will do best. Some of the bigger names on his list are Goldcorp (their main mine is very near where we live), Royal Gold, Franco Nevada and Yamana Gold. Any of these will do well over the next several years.

An exploration company I like is called Rubicon Minerals, because it has good exploration finds in Red Lake, near our local Goldcorp Red Lake Mine, and the primary investor (Rob McEwen) has very deep pockets.

In the silver sector, Pan American Silver is the big name. Two companies with very large undeveloped silver deposits are Mines Management, which I mentioned to you earlier, and First Majestic. Silver usually lags gold in the early stages, as is occurring now, then overtakes and outperforms gold, as it is a smaller market.

For market analysis, I think the best overall newsletter is written by Pamela and Mary Ann Aden. Doody’s “Gold Stock Analyst” is the best gold mining advisory. For daily market analysis, look at Bill Fleckenstein. You can find any of these with a quick Google search. You have to pay several hundred dollars per year for these advisories. Fleckenstein is cheapest, and Doody most expensive.

As far as timing, the Adens describe four cycles in the gold price. The gold price is presently in what they consider a “modest” down cycle. This modest weakness is usually followed after a few weeks or a couple of months by gold’s strongest rise, which may run for several months. The question this year is whether gold goes to $1200 or $1300 or higher. My own bias is actually slightly higher - in the $1600 range, though I am thinking in terms of 2010 to see that kind of figure. That move will drive the gold stocks quite powerfully. After their (irrational) weakness last year, gold stocks should be this year’s best performing sector. The best time to buy would have been at the bottom in November 2008. However, the present period, including likely the next few weeks, should also be a good time to buy at lower prices.

I find timing the most difficult aspect of investing, and I don't think anybody is on top of how to do that. It’s always a guess as to when is the best time to buy or sell. However, it is possible – not certain – that gold stocks might do very well this year in particular.
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Is This 1929-1932 All Over Again?

19 & 21 October 2008, 6 March 2009

Mark Lundeen is graphing the 1929 and 2007 bear markets in terms of the performance of the Dow Jones Industrial Average. I advise my readers to follow his work. (The following chart is up-to-date as of March 6, 2009.)

The question everyone is asking: Are we now in a recession or a depression?

Answer: Too early to tell.

Evidence in terms of the Dow?

So far, we can't distinguish the 2007 bear market from the 1929 bear market. We are neck and neck in terms of declines.

How are US corporate earnings doing?

According to John Mauldin, despite its declines, the S&P 500 remains in heady (bubble) territory with its forward price-to-earnings ratio still at a 20.2:1 level. How can this be, following such deep declines in the average? Well, the price has fallen, but so of course have the earnings. Can corporate earnings fall further still? They certainly can, and probably will.

Warren Buffett is buying at current levels.

He is likely to get a bounce, but even the great Buffett has been wrong at times. If we are replaying 1929, we are not yet halfway to the bottom. Mr. Buffett is also exposed to financial risk due to his entry into the volatile insurance market several years ago. That is a different - and riskier - game than operating Dairy Queen.

However, based on a geopolitical analysis, and assuming it can all be fixed for $1 to $2 trillion, George Friedman of Stratfor is calling for a recession, not a depression.

Of course, the fix could end up costing more than $1 to $2 trillion.... If the $596 trillion dollar global derivatives market implodes, it could cost a lot more then $1-2 trillion to fix this mess.

In 1929-1932, the GDP of the United States fell by 50%

Ben Bernanke and Hank Paulson are working against that outcome by "reflating" the banks (and desirably the economy, if the banks can use the funds to loan, and if anyone will risk borrowing in this environment). This will result in a certain rising long-term outcome for gold, whether the eventual outcome is inflation (most likely) or deflation (if we follow a Japanese course).

Why does no one know?

Bank financial accounting is a black hole. There are so many financial sticks and levers to play with, no one anywhere knows the real financial condition of the banks. Is that a bad sign? Probably.

Is this 1929-1932 all over again?

In some ways, this time is better. The 2008 recession is only just beginning (if one disregards John Williams' true inflation and GDP numbers). The financial dislocations are occurring in the context of a much larger, more diversified, more resilient and far more open world economy.

On the other hand, the series of bubbles that spawned the 2007-2008 market crash have been far larger, and the extent of recent financial speculation and excess has been far greater, than anything imagined in 1929. The current United States financial picture, particularly in the arena of debt accumulation, is actually far uglier than the situation preceding the great depression.

The United States has undertaken an experiment in debt accumulation that is a "first" in world history. We are thus walking down a road that has never previously been trodden. That is, no economy this large has ever accumulated this much debt. On its own, the US economy is clearly in a tailspin from which recovery cannot be generated by internal means. So, if we make it out of this one alive, it will probably be thanks to the diversified global economy.

So, is this 1929-1932 all over again?

Due to the resilient global economy, this time could be better.

On the other hand, due to the United States' speculative debt bubble, unprecedented in world history, this time could also be worse (something that no one has had to think about for several generations).

We'll just have to wait and see.

Make no assumptions.
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