Friday, October 3, 2014

The Banking System is NOT Safe, Get Your Money OUT!

Since before the crash of ’00, I have thought the banking system was susceptible to pressure. I didn’t want to have my money in a bank because I thought the banks could go broke very quickly.

Fast forward to 2008 — all the banks were essentially broke, as far as I could tell. The Fed came in to support the banking system, which they’ve now been doing for the past six years. And yet, there has been essentially no improvement in capital ratios at the banks and the risk of putting money there. In fact, you now lose money when you put it in the bank because of negative real interest rates – and you still take on the risks associated with the bank. To me, it’s just totally ludicrous to put yourself in that position when you realize how levered the banks are.

A lot of people would contend that ‘things aren’t that risky’ because we have this ‘wonderful economic recovery going on.’ I think that’s mostly bunk — there is no real recovery. We’ve spent trillions and trillions of dollars buying bonds and we’ve taken interest rates to zero, but we have very little to show for it. Certainly not any great recovery. I look at economic data like Caterpillar’s sales and McDonald’s sales which have been stagnant. Consumer confidence as reported by Gallup has been flat for 2 or 3 years.

90% of the US population hardly gets any wage growth and we have significant inflation. A great portion of that inflation comes from what we call ‘shrink-flation.’ You go to the store and buy a box of cereal, but your box has 20 percent less cereal than it used to have. The price may be the same, but the fact is that for the same value, your costs are up 20 percent. There’s also the price of beef, chicken, or pork or any kind of commodity that you want to talk about. They’ve all risen dramatically. The consumer is not better off; in fact, he’s way worse off today.

And I don’t even know if he has felt the true impact of the healthcare costs, with the rate increases from various states. They always seem to be double-digit increases. When your healthcare is already 20 percent of your expenses and you’ve got double-digit increases in your healthcare cost, that’s significant inflation. It’s your whole wage increase, if you have any.

Then you also have a big problem in America with student loans. You have these huge handouts that people regard as free money but ultimately results in a cost. It sustains an entire industry relating to education because the students keep taking on 50 or 100 billion a year in new student loans. But you borrow and eventually you have to pay off those debts. That’s why you hear all these stories about people who have to pay off these student debts but are in no position to pay them. This isn’t good for the economy.

Why do I talk so much about the economy? Because if the economy doesn’t turn around and we end up with either a slow economic contraction, or if a black swan comes along and makes that contraction faster, it weakens the assets of the banking system. If you have a 5 percent decline in your assets and you’re highly levered, it means you’ll get wiped out. A 5% decline in the stock market is not an unreasonable assumption. We have cracks in the housing market here — and not just in North America. You have all these subprime and auto loans that will come back to haunt us. Those loans are on the books of financial institutions.

There is a large list of potential black swans out there, whether it’s geopolitical stuff in the Ukraine, in China and Japan, or India and Pakistan. Some government could find that it can’t pay its bills and renege on its debts. There is also this whole Ebola thing in Africa. This disease is described as out-of-control. The prime minister of Liberia had to sack some of his ministers because they all left the country. If you were in Liberia, you would be leaving too. Many end up exporting the disease when they leave. If it starts showing up in Western countries, the implications for the economy could be hugely negative.

Going back to the original thesis, I was concerned in 2008 with people having their money in banks and was saying they should own gold and silver.

- Eric Sprott via Gold Investing News