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Friday, June 20, 2008 - Vol. 10, No. 148
Today's comment is by Eric Roseman, Investment Director and editor of Commodity Trend Alert.
Something smells a little fishy to me...The Federal Deposit Insurance Corporation (aka the "FDIC") just launched a series of full-page advertisements in U.S. newspapers. On the surface, these ads are celebrating the FDIC's 75th anniversary.
According to the ad, the latest campaign, published in Monday's Wall Street Journal, celebrates the institutions' long-term safety net of public funds up to US$100,000.
The full page, and no doubt expensive, ad serves to remind depositors that the FDIC is there to protect cash deposits and CDs.
In all my years of reading the Journal and other financial newspapers, I've NEVER seen the FDIC advertise their work.
So doesn't it seem a little suspicious that the FDIC took out a full-page ad in the midst of the country's worst financial crisis since 1990?
I've got to wonder if the FDIC is firing a warning salvo ahead of a rash of small bank failures in 2008 and possibly, in 2009.
Are more banks likely to fail? Maybe the FDIC wants to remind depositors that the government ONLY guarantees your cash deposits and CDs up to US$100,000.
The Birth of the FDIC
The government created FDIC during the Great Depression. At the time, businesses were collapsing and bank failures riddled the economy. From 1920 to 1934, a total of 9,812 banks were suspended, closed, failed or merged, according to Colonial Statistics.
From March 6 to March 13, 1933, President Roosevelt declared a banking holiday. During that week, all financial institutions were closed and depositors could not access their funds. During the Great Depression, the Roosevelt administration also confiscated gold ownership.
The number of U.S. bank failures since the onset of the credit crisis last July is still under 100. But from 1988 to 1990, over 1,000 American banks failed, mostly because of the Savings & Loans crisis.
No Mom and Pop Banks Are Safe
Considering the depth and longevity of this crisis, it's probably fair to assume many more banks will succumb to failure or suspension, especially smaller banks. In fact, a few months ago, Fed Chairman, Ben Bernanke, warned that he expects a rash of smaller banks to fail because of weak capital ratios and bruised balance sheets.
Bernanke, of course, won't bailout a small bank in Arkansas or other Mom and Pop banks in Middle America.
But the Fed did bailout Bear Stearns in a forced merger with J.P. Morgan Chase in March. They will also rescue other large U.S. banks if they pose systemic risk to the financial system. These include J.P. Morgan Chase, Citigroup, and Bank of America.
The Fed is desperately trying to help FDIC member banks rebuild their capital ratios and cut interest rates to 2% recently.
Low Rates Only Help So Much...
Low interest rates help boost lending margins for banks. When rates are low, spreads widen between short-term and long-term lending rates. However, the problem is most banks have pulled back from lending since the onset of the sub-prime debacle last summer.
Mortgage lending has collapsed. Consumer credit is especially difficult to secure, especially while these banks' balance sheets are eroding. We've already seen enough massive write-downs and plunging capital ratios to be jaded by the numbers.
Indeed, 2008 marks the 75th anniversary of the FDIC.
Yet, I doubt this is a celebratory environment for an institution that serves to protect depositors. I've got a feeling the FDIC will be quite active over the next 12 months as smaller banks, including possibly some regional banks, head into bankruptcy.
The government's safety net might offer peace of mind to some individuals, but for most depositors it's a stop-gap none of us want to secure. As a precaution, park your cash and short-term emergency liquidity needs at J.P. Morgan Chase, Citigroup, Bank of America or 90-day Treasury bills. I'd avoid small institutions and the regional banks.
ERIC ROSEMAN, Investment Director
EDITOR'S NOTE: Over the last year, the Fed has: Bailed out institutions, cut rates to the bone, auctioned off liquidity willfully bought the sub-prime junk off several balance sheets that no one else wanted, and sacrificed the dollar's value to try to stimulate the economy. So the question is: What will the Fed do next? The world will find out after next week's Fed meeting. But we're not waiting that long. Next Tuesday, Jack Crooks will host a FREE webinar to explain exactly how to profit off the Fed's next big idea. Click here to join us absolutely FREE, next Tuesday June 24th at 12 NOON.
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Deflation, Inflation, Stagflation...Take Your Pick
The "official" inflation rate in the U.S. jumped 4.2% in the 12 months to May. That's the fastest rate of price increases in more than 10-years - mainly due to... you guessed it: soaring food and fuel prices.
But of course, this isn't just a U.S. problem. In fact, "official" inflation rates in American look positively tame compared to soaring inflation around the world.
According to a recent Bloomberg story, "The International Monetary Fund predicts the fastest inflation in advanced economies since 1995 this year even as they grow at the slowest pace in seven years."
That sounds a lot like the definition of stagflation to me.
Around the world inflation is catching hold, which is a whole new challenge for global central bankers to deal with.
The European Central Bank (ECB) has a stated goal of keeping inflation in check at 2% or less. Too bad for them. Eurozone inflation is soaring at a yearly rate of 3.7% - the highest in nearly 20 years. Since prices are rising at nearly twice the ECBs target rate, there's a growing likelihood of rate increases, perhaps as early as July.
Two of the world's fastest growing economies - China and India - are struggling to reign-in what looks like runaway inflation - up 7.7% and 8.8% respectively over the last 12 months alone.
Inflation is running at annual rates of: 7.5% in Singapore, 9% in Argentina, 10.4% in Indonesia, 10.5% in Saudi Arabia, and a whopping 15% in Russia! Brazil's central bank, which has done a great job bringing inflation rates down substantially over the last decade, recently began raising rates again to combat inflation now at 5.4% and rising.
So what's the solution to high global inflation? A stronger currency might help. That's what Federal Reserve and Treasury Department officials have been saying lately, talking tough on inflation - by talking UP the dollar. So far, this is just a war of words, but dollar-sentiment is shifting. We'll see if this "tough talk" actually holds up next week.
MIKE BURNICK, Senior Editor & Global Markets Analyst
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Extra! Extra! Read All About It: "Exit Tax" Becomes Law!
I'm sorry to say: America now has officially joined the ranks of Nazi Germany and Stalinist Russia by enacting its first-ever "exit tax." President George W. Bush signed the legislation - passed unanimously last month by both the House and Senate - into law Wednesday, June 17.
You must pay the exit tax within 90 days of expatriating. That means giving up your U.S. citizenship or (in some cases) long-term residence in the United States. Only a few hundred people do this each year, but Congress didn't like the fact that severing all ties to the United States allows wealthy people to legally avoid all U.S. tax. For my take on the exit tax, click here.
The news isn't all bad, though, particularly if you're not wealthy enough to trigger the tax. In that case, you can bypass some of the complexities and hassles of the law the exit tax replaced. If you are wealthy enough to trigger the tax, though, the new law will definitely make life more difficult if you ever decide you want to take the only legal path to permanently end all U.S. tax obligations.
MARK NESTMANN, Privacy Expert & President of The Nestmann Group
www.nestmann.com
P.S. Is expatriation for you? It's not a step for the faint of heart, but if you're seriously interested in this option, my company can help. Contact me at info@nestmann.com for more information.
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