This page has been archived and commenting is disabled.
On EU banks, Solvency or Liquidity? - Or BOTH?
I look at the financial statements of the big banks. 10-Qs and the like. I’ve concluded that, for the most part, it’s a waste of time. There are usually 70 or so pages of numbers and discussion. Tons of data. But what is missing is a realistic appraisal of what the assets are actually worth.
Rather than go blind looking at small print I just look at market capitalization and assets. The balance sheet assets are a good proxy for what has to be funded. The market cap (shares outstanding X current market price) is the only number one can look at that is “real”. It is real because the “tape” and the market say so. It is a much more reliable number than what the accountants, auditors and management tell you.
Market cap is critical because there is a presumption that a big bank can go to the equity market and issue preferred and common stock equal to about 10% of the existing market valuation. A big equity valuation is a cushion in troubled times.
Societe Generale, Paris is a big bank that has been much in the news this week. SoGen is a top tier global bank. They have a very large deposit base and consumer business. They are also a big global trading bank. SG is well managed. I would call it one of the Crown Jewels of the financial picture in France. It is a classic Too Big to Fail.
Having said all those nice things about SoGen I also have to point out that it has a very thin margin of market valuation to support its huge balance sheet. The market cap/asset ratios for SoGen, Wells Fargo and JPM:
Looking at this one sees the problem. SoGen is levered 4-6 X’s the US banks.
Under normal circumstances my way of looking at things is irrelevant. It only becomes significant when there are problems. Today we have problems.
There are monstrous gobs of liquidity in the world. But every day that goes by that liquidity is getting more and more risk adverse. Globally there is about $60 Trillion of funded debt of one form or another. That huge amount has to be rolled over constantly. A very substantial portion of this has maturities of less than six months. It is a “faith based” system. The assumption is that there will always be ample liquidity from the holders of cash to roll over everything without a hiccup. At the moment there is not much faith in that system.
The nice folks at FTAlphaville put up this interesting chart Friday afternoon. It tells the story perfectly. Everything is green except the month of August and the very short end of the funding spectrum. The red area is a Short Squeeze. This is also a big Red Alert!
The lower the equity cap of any financial, the greater the risk that there are funding problems. This is what did in Lehman. Almost overnight they lost their funding sources. (Note: This is what happened to Drexel in 1989. I was there. It took ten days to go from soup to nuts.)
SoGen, being what they are, will not be the first bank to suffer liquidity problems. I used their equity numbers to make a point. It is the second tier Euro banks that are going to get squeezed. I have no doubt but they are already feeling the pinch.
I can’t see this going on much longer. We may have already passed the point where the downward spiral on funding availability is irreversible without global central banks stepping in.
.
That brings us to Jackson Hole. Damn near everyone I read is thinking that Bernanke is going to pull a rabbit out of his hat next weekend. Some new form of monetary stimulus will be announced and all will be well for the markets once again. I don’t agree.
While the US has some major league problems, those issues can’t be addressed by the Fed. There is nothing more that the Fed can do. With short-term rates at zero (and planted there for years to come) and the ten-year at 2% there is nothing left to be done. Or is there?
I maintain the next move by the Fed is to massively open up the dollar swap lines with European central banks. I don’t think Bernanke wants to announce this significant step at Jackson Hole. It is an EU issue and the Fed can’t take the lead on this. Opening the swap lines will prove to be very unpopular in the US. Politicians will jump on it as a bailout of Europe while America is struggling.
Bernanke is going to take some heat, when this happens (I think this is now a certainty, just not sure of the timing). But I also think that Bernanke is pushing (as I write) for this to happen. The only option left for Bernanke is to put another half trillion or so into the global system. He can’t do that in the US, but he has a great excuse today to do it in Europe.
I maintain the forum for this is not Jackson Hole. There is too much theater in all of this already. The Europeans don’t want this to be a circus (more than it already is). They want to be seen as responding to an EU problem, they don’t want to be seen as a slave to Bernanke and the Jackson Hole confab.
The announcement of the swap lines will not come from Wyoming. It will happen on a Sunday night. It either happens before next weekend, or the weekend after. Given that things are rapidly unwinding in the EU funding markets I don’t think they want to wait another two full weeks to put a band aid on the problem. They have to do something sooner than that. If they don’t, they risk a full scale liquidity blowout before September. If the blowout were to happen it would be very difficult to reverse. They have to (attempt) to get ahead of the problem before it is a crisis.
I think there is a decent chance this important next step takes place outside of Jackson Hole. It could happen this Sunday night. If I’m wrong, and we get nothing, the European funding markets are going to collapse next week. It will be very difficult to reverse the damage that this will cause. All the central bankers know this. They know that there is not much time left to act. They can’t wait another two weeks.
»
- advertisements -
It was $200 million. Just a warmup/signal.
Now we're getting to the crux of the problem!
The Swiss National Bank has already re-accessed the swap line.
While the amount was small, it repeats the scenario that played out in December of 2007 when the SNB was one of the 1st to seek assistance for short term funding problems leading up to the collapse in Sept of 2008.
History, what a concept! I can't get into it now, but if we go back to 1932, 3 years after the initial collapse in those dark ages of manual finance, we see another set of similarities caused by massive currency imbalances.
What really makes me laugh is when I hear all the talk of the disparity caused between the Piigs and the German-Franco Empire in what is a global economy where currency is never more than a proxy of value or worth.
Once again, Adam Smith had it right all along. Gold doesn't matter, coin doesn't matter, except to the extent that they are needed to provide an easier form of exchange for corn or any other bulky asset necessary for existence. Fight it all you want, but value will eventually fill the void and find balance within the universe, no matter what you attempt to deny it with.
I am baffled by the SNB and the 200mm. Did you know it was reversed? Just three days after it was put on?
WTF?
In the past 10 days the SNB added 270B in CHF sight deposits (cash). They used that liquidity to drive the forward rates on the CHF to steep discounts. To to this the SOLD spot CHF and they BOUGHT USD in the cash market. The did this for 10s of billions of CHF.
This means that SNB was sitting on a mountain of USD in CASH!! Billions!
So why in hell did they borrow a lousy $200 mm under the Fed swap line???
Like I said, this one is a mystery to me. But like most mysteries, if you figure it out there will be a big payoff for you.
Bruce... I believe that this was a trial run, much as the Fed has done trial runs with repos.
a "corn standard." very interesting and quite possibly very, very, very true. Chavez owes the world a lot of money so i'm not sure he's going to "get his gold." of course there's the "old fashioned sovereign debt collection Agency" as well:
http://www.youtube.com/watch?v=JrjQrOx9L6U&feature=player_detailpage
Yep, ThirdCoastSurfer has got it right.
Value fundamentals are no longer in vogue. Everywhere it is SMA 50,100,200 day and with seemingly everyone using similar SMA tools, IT IS BACK TO THE UNEXPECTED and contrary that is the champion tool together with fundamental valuation analysis.
Traders today will pay the price just relying on SMA. Funny thing is, it is called technical analysis but it's not really that technical. Just smoothing trend lines. Hell, any decent Algebra student in high school can master that.
And now the vast majority of billions of dollars are traded SOLELY on the greater fool theory.
Christ, the volatility will be extreme as the SMA gang get creamed. There can only be so few winners for short term plays.
TCS,
isnt true that if you lay the dow 1929 and the dow since 2008 you get almost the same overlay?
also, are you in the gulf coast area?
Gold's rise (unlike silver's) required BIG Money to push it up this high, this fast, and keep it up after the margin hike. I.e., well-connected institutions and their employees and cronies. They KNOW the cookie is about to take a hit--it's not just "speculative" or "fearful" investors who are doing the buying.
Yep, Roger is right. The Unveristy of Texas trust fund bought over a billion of $$$ worth some months back, and took possession of PHYSICAL. They bought in the $1200-$1300 /ounce range.
the big money was positioned long ago.....
the s&p downgrade was government backed. It was to intentionally start the chain of events.
That little gold price you see on CNBC or goldseek.com is government controlled. where and when it goes to pluto will be government controlled.
One night soon the true physical price of gold will be known and this joke will be over.
Bigger hitters than you point out are driving the gold price...
Central banks, soverigns and soverign wealth funds... many of them in SE Asia, India, Mid East...
Neither America nor Americans are driving the gold price... At least, not to the degree that Americans seem to believe...
Just one of many such articles recently...
"Indian Gold Imports May Reach Record 1,000 Tons as Investment Demand Rises"
http://www.bloomberg.com/news/2011-08-20/gold-imports-by-india-may-reach-a-record-1-000-tons-on-investment-demand.html
The thing about retail gold investors is that they infrequently sell historically.
I am wondering what % of those Indian gold buyers are retail.
The ladies love their 22 carat bangles and necklaces.
The 'gift giving' season for India has not begun for 2011... that will happen in the fall.
India, line China, the Mid East and most of SE Asia, are not consumers as the word is used to describe American consumers. These people are not running out and selling their gold to purchase the trash sold on American tv, autos, or poorly constructed Macmansions. Family gold/PMs are sold only to purchase other assets that will be beneficial to a family, or, in case of dire emergency.
It's difficult to understand how strong 'family' is in SE Asia if one has not lived there among the people.
The fear of fiat currencies and their every diminishing purchasing power is foremost in the minds of these people... while in Western cultures it is hardly considered outside financial circles.
"The ladies love their 22 carat bangles and necklaces."
It is the 'family' that loves the 'bangles'... and they are not bangles to those that possess them. They are a store of value with very tight 'buy/sell' spreads because of the tremendous competition among India's millions of jewelers.
You should stand in an Indian jewelry shop and watch the use of a touchstone... I have asked many American jewelers if they used touchstones and most did not know of what I was talking!... and none use touchstones to determine gold content of metal!
America is in a different universe from India when it comes to gold appreciation.
OK--what is a touchstone?
Wiki here.
Regards,
Cooter
Nice analysis, Bruce. I'm in agreement with you that QE3 won't be announced at JH, and am putting my money on it. Not that monetization will end. But it will be something different, and what you suggest is a very good possibility, for the reasons that you state.
Bruce,
Thank you, it's good analysis. I think you are correct regarding swaps as the next and only currently available Fed response. I am not so sure though about your timing estimate. It's only speculation on my side, but i think the current situation is not dire enough for Bernanke to react given extremely strong bipartisan opposition to the idea of any bailing out of Europe. My feeling is he would wait until situation becomes really critical, which is not yet happening. It might happen any time though, and not necessarily during weekend....
Note to bkrolik - actually I believe Bruce is spot on. This time they can't wait or it's too late.
'The Emergency Room is already almost full and lots of people will be in line later if he waits to get in. It will be too little , too late if he waits.
Asian markets and Europe openings Monday morning sure will be interesting. Those guys will need to pack a good lunch and order out for dinner, because this is going to be volatile and a jolly good show.
Leveraged shorts will take a gain, and reposition for their next follow up entry. Like a flock of birds chang direction in a brief swirl of changing winds, panic to bank short profits WILL BE THE REAL DEAD CAT BOUNCE.
Shalom Ben wants to use Europe as a QE laundry.
Where is Spitzer and his "Euro will be the next reserve currency of the world" trope? I exchange Euros for gold faster than dollars.
That`s the role of the EUR, to ensure the flow of gold. Keep stacking ! Oh ... here is Bill Bonner spreading the word ...
http://www.youtube.com/watch?v=6Ou8Qva6z-g
chart fxe, you tell me how muxh it has dropped. almost nada this time around. last year in june it was an easy call to buttom time the buy because of where the euro is, but because central bank intervention were are seeing market behavior that doesn't go with the currency moves. the dollar being the carry trade unit of choice in the current environment should go up as the markets go down. not happening
He is in his home office looking at charts wondering why he keeps badmouthing silver.
Bruce, correct me if I am wrong, if the government of France buys SocGen Bonds or stock, then it costs them a measly 100B to put them in the same financial shape as Morgan.
What is going on is something else. The plan is not to fix the problem but to wave the bloody shirt of SocGen liquidity to justify the 2T dollar printoff.
Like my name, the solution is always Printfaster.
The whole script is laid out in Ben's famous "printing press" speech:
"The Fed can inject money into the economy in still other ways. For example, the Fed has the authority to buy foreign government debt, as well as domestic government debt. Potentially, this class of assets offers huge scope for Fed operations, as the quantity of foreign assets eligible for purchase by the Fed is several times the stock of U.S. government debt."
http://www.federalreserve.gov/boarddocs/speeches/2002/20021121/default.htm
I would bet before all is said and done FED will be buying/backing Eurobonds, as bizarre as that would be...
MrPoopypants, I just read that link and the words 'shallow understanding of how an economy works' come to mind. I say that without any sense of superiority, indeed, I double checked to see if I am the one being shallow, but having read widely in the last five years, and more than two years here, I think my education is paying off.
Spot on. The whole ZH thesis since spring is that they want a liquidity crisis to justify QE3. Why would they solve the crisis before it starts? No, there needs to be some real fear first. Then they'll step in as reluctant saviors.
I have a question, for you pros to scoff at. With gold approaching $1900 per oz, how is it that the stock price of various gold mining companies, (i.e. Newmont, Freeport McMoran), are not even up to their recent highs? Which will give way to the other?
Thanx for any input.
why do you think the stock market has anything to do with the underlying economy ?
Your assumption in trying to understand why gold miner stocks seem undervalued is that North American investors anymore are rational in studying and analyzing fundamentals. Most physical PM like gold are being bought up by investors worldwide, not just Canada and the US. In fact, not many retail Amerioans invest in gold. Most of them are hawking their 12 and 14 karat jewelry to get cash to pay off credit cards and current obligations.
These days most all investors are avoiding equities of any kind. It seems to be all SMA investing anymore. Everyone is following charts, divergences, and other stats.
Miners are indeed a good investment in this time period.
Just buy them. Don't worry why they seem undervalued. That's the way it usually is, when you buy low - the real money makers are the contrarians who understand fundamentals and invest. There are few short timeframe winners - the ones following charts and trying to be on the winning side of some 50 , 100, 200 day SMA often have a poor track record. There are ALWAYS just but a relatively few winners in the short term who buy and sell on the quick flip.
A fool and his money soon go separate ways.
In the past, those interested in owning gold had 2 choices: physical posession of bullion or mining shares. Now they buy GLD and think they own "gold"; they are sadly mistaken, it might all end in tears for them. Much of the money that might have formerly been going into Newmont and Barrick et al has just been going into GLD. The squeeze will be on for physical bullion very soon and the miners might go parabolic when "the market" wakes up to that fact. I like some juniors and a couple of seniors; the pain has been acute but offset by gains in my physical holdings of gold and silver.
Good Luck, fight the good fight.
Physical and the Miners are the only real plays. Pumping cash into GLD and SLV will end in tears for the small time investor. Big players use these stocks for a few things. To sell massive blocks to get physical delivery, to short the paper market and bring down the spot price, and settlements at the Comex. All big money scams.
So, which juniors and seniors do you like?
Thanx DaBernank. I thought something like that might be over some horizon, and believe that I make some plays in that direction.
Bruce, et al.,
I'm trying to figure out the likely reaction (short-term) in gold and silver. Don't you guys see a short-term whacking of precious metals in the offing? Or do you think the holdings are now in strong enough hands to stave that off? The CME margin hikes of silver crushed it in May, but the margin hike in gold the other day only knocked it down $50. What's your take?
Buy the dip. (if there is one)
We are very far from being out of the woods.
Dip in USD will never happen again, my VHO. Au and Oil run together, the world already shuns WTI and treasuries. Barter will flourish for some time, my coutry sells grain for oil already. Peace
Bruce, spot on again.
I conjecture that any dip howevr will be the inverse of a dead cat bounce on a short term commodity sell off, similar to what we saw in 2008.
It will be - as crazy as it sounds - difficult for many to buy into. Either they are without the funds to buy, or fearful.
Keep some cash handy for the dip and make up your mind now to buy into it.
Excellent observations BK...
One point that no one seems to make so far...
If a major fiat currency collapses there will suddenly be a great deal of suspecion cast on all of the other major fiats... and a tidal wave of money rushing into PMs...
Perhaps this is what the Fed wants to avoid...even though the Euro currency is in competition with the dollar and all other fiats...
Maybe Benny has put himself in another unintended bind...
If a major fiat currency collapses there will suddenly be a great deal of suspecion cast on all of the other major fiats... and a tidal wave of money rushing into PMs...
Jonathan Ruffer predicted this ages ago.
Unfortunately, Jonathan didn't inform me of his prediction...
Besides, it isn't the prediction that is important (we all have thoughts that others have already had)...It's the result of a fiat collapse that is important.
you people have no idea what you are talking about. you will win the battle (your silver and gold will skyrocket) but lose the war (international trade, food, medicine, nitrogen/phosphate imports, packaging, electric grids would collapse if any of major currencies go poof). The OECD is incredibly interconnected right now and any lack of confidence in accepting Euros, Dollars, Yen, Pounds for Letters of Credit for trade shuts down critical supply chains within weeks (or days). (Maybe Yen could collapse and rest of world would continue trading, but not the other 3). Yes we are in dire straits but bashing the FED and 'rooting for fiat collapse' is going to result in a total nightmare if it catches on beyond the small % of people that are actively understanding it. Put bluntly, it isn't just the financial markets at risk but industrial civilization. Stop with the glee already.
Think of it as chemotherapy. Is it gonna hurt? You betcha. But just as no chemo means a sure death for the cancer patient, so too does no reset (collapse) mean the death to our industrial civilization.
In case the "chemo" goes too far, you got your MAD MAX on?
I concur! if we whoosh instead of poof, there will be a gold dip as investors liquidate what they can. Good time to buy the shiny stuff then. We're a long way from over the problems facing equities, housing, and confidence. I am holding 70% gold and 30% cash for now. Keeping powder dry for now.
Will probably never be less than 15% gold for next decade. When fear abates, inflation will be moving in. Reason to have gold in portfolio in either situation. Amount to vary dependent on moments.
I think there will be a turning point where investors will not pay the premiums to invest on an exchange and will turn to physical, and this will cause a massive short squeeze. The premium prices are high, but the investor mentality still does not understand that gold and silver are more than a commodity- they are also, and more than anything, real monie.
Once people understand gold is still the underlying asset of the fiat ponzi, due to the Treasurie holding, and Federal Reserve loaning it out to pay for the debt, then people will run to physical bullion. I think a target price of $5k gold and $250 silver sounds about right to begin a squeeze, and that should happen in about one to two years (conservative timeline estamate).
Of course, there will also be a point where institutional investors like Rogers and Soros through their paper gold into the fire, claiming a top of a bubble, and this will add paper liquidity. At which point I think the market will turn sideways. Then I think a revaluation of fiat will occur, whence fiat has such a low store of value that the IMF and World Bank, at the behest of the Bank of International Settlements, issue a new world reserve currencie, and thus gold and silver double/triple.
Great insight, Bruce.
So if the Swap opens this Sunday, then it will need to be announced and addressed at Jackson Hole by Bernanke, or someone in another location; though, from where you stand, it looks like it should happen the following Sunday night, because then this circus policy will not be the main event at the Hole- but then the Eurpean markets get a nail in their proverbial coffin because the Federal Reserve are trying their hand at PR for the first time in their almost 100 year history.
I would say the policy makers are up against a wall, but with so many walls around them, it appears they are boxed in.
Question: How does Europe obtain US$ reserves and aid the elite to get the precious metals complex down at the same time? Answer: Europe agrees to sell gold to the FED (if only in a paper lease swap).
A: trading goods with dollar holders while shuning the printer. Europe will never ever again sell gold because the EUR is backed by two things: USD holdings and Gold.
If BK right, and Bernanke do this it will guarantee a Ron Paul win next election.