Tag Archive | "too big to fail"

When “Too Big to Fail” is Too Small

An economic earthquake has started in Germany, unhinging a bank that is “Too Big to Fail”.   

Our world turned upside down when, starting in late 2007, the real estate bubble popped.  Many Americans saw their homes slide underwater, their stock prices plummet and the earnings on their safe savings collapse to zero return.  That  financial ruin was created very much in part by banks that were “Too Big to Fail”.

Now as stock markets reach all time highs, another debacle is rising.  The tremors have already started, aftershocks from 2009, that can create a greater economic landslide.  One scandal in Germany has spread to the US and is growing.  This calamity can make the safety net of “Too Big to Fail”, too small.  The disintegration that ensues could ruin average investors in three ways.

The failure comes because the bigger the bank, the more corrupt it seems to be.  This makes sense. These banks have little to lose.  Why not cheat and take risks?  When fraud and speculation fail, the bank is bailed out by taxpayers.   No one, except the customer, gets too badly harmed.

Wells Fargo is an example.  Even after new regulations and backups were put in place after 2009, this entire organization continued to treat clients with complete disdain.  To make matters worse the cheaters at the top of Wells Fargo were not really punished.  In fact they were pretty well paid considering they were crooks.  They were caught leading an organization with organized, outright fraud (smaller doses of the same thing would have sent you and me to jail).  The CEO of Wells Fargo resigned as the scapegoat.  A point was made that he did not receive any severance pay.

However filings show that after leading the bilking of millions, he did keep more than $100 million in stock, plus received pension benefits exceeding $24 million.  Poor guy, but I guess that seemed better than a federal jail.

The heart of the “too big to fail problem” has been bonuses paid to bank employees and executives.  The employees are motivated to take risks.  If the risk pays off, they are rewarded.  If the risk turns into disaster, the government steps in with your and my dollars.  Government regulations since 2009 have helped stop this excess.

Government intervention has made banking harder, but in the case of big banks, which are backed by taxpayer dollars, the extra government oversight has not stopped the problem of big banks taking advantage of us.  

But now, the trend will likely reverse.  There are three reasons why.

First, banks will have more opportunity to cheat because of increased stock market turmoil.  Every part of the US stock market has reached an all time high.  Yet global stock market volatility has also picked up.  Whether Donald Trump does a good job or not, one thing we can be sure he will do is bring uncertainly.  Nothing makes markets shakier than the unknown.  The fact that Trump voters were not the majority adds to this fear.

Second, the next administration will favor big overseas banks.  These big overseas banks have especially taken advantage of investors and home owners.  Foreign big banks have acted with impunity and need to be regulated, but we can expect the next US administration to ease regulations on these banks.

For example, one of the most corrupt and heavily fined overseas banks, Deutsche Bank, is in a special position to gain favors.

Deutsche Bank has been a special leader in all types of nefarious activity.  This was a lead bank in ripping off mortgage holders and investors with bad mortgages that created the great recession.  The US is trying to collect $14 billion in fines to settle claims on bad mortgage-backed securities that helped the cause of 2008 financial crisis.

The bank has plenty of problems.  In addition to the fines, it has extensive financing in London real estate that could be harmed by any economic slowdown created by Brexit.  Deutsche has remained a leader in commercial mortgage-backed (CMBS) loans.  They were the top CMBS  lender in 2015 and 2016.  Upcoming legislation could hurt this source of revenue.  There is also a probe related to embargo violations of equity trades for wealthy clients in Russia. Plus the International Monetary Fund has said that Deutsche Bank is “the most important net contributor to systemic risks”.

These facts should be enough to cause a breakup of the bank.  This could in turn contribute to helping get a grip on other overseas lenders that are still being investigated for similar offenses and could face penalties.  These banks include the Royal Bank of Scotland, Barclays, Credit Suisse and UBS.

Yet Deutsche Bank happens to be one of the largest lenders to Donald Trump.

A Mother Earth Jones article “Trump’s Huge Conflict of Interest With a Big Foreign Bank Keeps Getting Worse” says: (1)

Deutsche Bank is in deep trouble. Its stock price has plummeted in recent days after the Justice Department demanded the gigantic German bank pay $14 billion to settle claims regarding its sale of bad mortgage-backed securities in the the run-up to the 2008 financial crisis. The bank’s shares fell to a new low on Tuesday over reports it might be seeking a bailout from the German government—which Deutsche Bank has denied. The crisis has exposed the fragile state of one of the world’s largest banks, but it also highlights a potential massive conflict of interest for Donald Trump.

In the past few years, Trump obtained $364 million in loans from Deutsche Bank via four mortgages on three of his prized properties: Miami’s Doral National golf course, Chicago’s Trump International Hotel and Tower, and the newly opened Trump International Hotel in Washington, DC, a few blocks from the White House. A foreign entity holding so much of Trump’s debt—financial leverage that could affect the decision-making of a future commander in chief—has raised alarms among ethic watchdogs. But with Deutsche Bank floundering, the possible conflicts posed by Trump’s loans are compounding.

The financial health of Deutsche Bank is important for Trump’s corporate empire. Because of Trump’s history of failed projects and repeated bankruptcies, many of the world’s top banks have long stopped doing business with him. Deutsche Bank was one of the only major banks—perhaps the only—that would work with him, and their relationship has been rocky.

But Trump has maintained his relationship with Deutsche’s so-called “private bank”—an arm of the bank that caters to wealthy people and has more flexibility in its lending standards than the corporate side. The four loans Trump currently has with Deutsche Bank are each from the private bank, a Deutsche Bank official told Mother Jones.

Deutsche Bank is also one of the largest originators of U.S. commercial real estate loans.  If Deutsche Bank were to close its US operations, there could be a negative effect in the commercial US real estate industry in multiple ways.  This creates an added conflict of interest for Donald Trump and the next administration.

Third, we’ll see rising interest rates.  Banks will raise interest rates as fast as they can.  The key to bank profitability is “Net Interest Margin”, the difference between the rate banks pay for deposits and money and what they charge for loans. 

The chart below from the St. Louis Federal Reserve Bank shows that bank net interest margin has been at an all time low.  The figures also reflect how and when the US Treasury bond rates rise, that there is an even higher Net Interest Margin increase shortly after.

fed chart

When interest rates collapsed in the late 2000s, banks made extra profit from one time.  Their securities portfolios rose, loan defaults slowed and the cost of deposits fell.  Yet over time as new loans brought lower yields and the one-time boosts were gone, the lower interest rates squeezed bank profit margins.

The government and the Fed will want higher rates to avoid runaway inflation.  As the government increases borrowed spending, inflation will rise higher than the Federal Reserve’s target of 2 percent.  The Fed will increase interest rates.  The Fed is against inflation.  There is a powerful motivation to protect the aging population as more and more boomers go onto a fixed income.  In addition the Fed’s board of governors has two openings that Trump will fill with anti-inflation choices.  This increases the odds that even before inflation picks up, the government and the Fed will be aggressive at increasing interest rates.  This will strengthen the US dollar short term but hurt the US stock market because the strong dollar reduces the value of revenue generated overseas.

The rising interest rates will be accompanied by inflation.  The government and the Fed do not want inflation but they will create it anyway.  They will spend more and reduce tax that increases US debt financed by savings from Europe, China and Japan.  Currently, America’s gross debt is more than $19 trillion, or 105 percent of GDP.  This has been sustainable in recent years because interest rates have been at historic lows.  As rates rise from slightly over 2 percent today to over 4 percent by 2019, government interest payments will more than triple from $250 billion in 2016 to more than $800 billion in 2026.  By 2030, interest alone will represent over 14 percent of the federal budget.  If interest rates rise even higher,  Federal payments will be even greater—a one percentage point increase costs the country an additional staggering $1.6 trillion over a decade.  If interest rates returned to the record-high levels of the 1980s, the country would pay $6 trillion more in interest alone.

The dollar will fall because almost half of this debt will be owed to countries abroad, especially Japan and China.

rate charts

The U.S. dollar has soared on bets that the US will see inflation. The U.S. dollar recently hit a one year peak.  Currencies especially in emerging markets have fallen to new lows.  The higher interest rates and stronger U.S. dollar are causing the weakest risky assets to plummet.  Interest rates on U.S. Treasury 30-year paper at 3% are triple that of Germany’s 30-year yields of barely 1%.  A closing of this gap as Europe increases its interest will create a US dollar drop.

The cost of living will rise.  Higher interest rates will push up prices for almost everything and push stock prices low.  All of this hurts banking profitability and makes it more likely that big banks will cheat more.

Here are three steps to take that can protect your investments in this scenario. 

Protection #1: Avoid Too Big to Fail Banks.  When you use a global bank, you are not using just one institution.  You are dealing with a big business that owns multiple banks in different regions.  This has costly implications for how far the bank’s equity goes, and how small safe the particular bank you choose really is.  Plus banks with two or more sub banks have more ways to take advantage of investors.  For example, one division of a bank can be recommending an investment to customers while having another unit in another country sell the investment short.  The bank makes money in three ways: creating the investment, selling the investment to customers and selling it short when the investment implodes.

Distinct national or regional entities held locally are much simpler to repair or dismantle when things go wrong.  Banks create such ringfenced operations in several places, so regulators cannot see the big picture and to keep their ripped off rewards from fines and penalties.

Use local community banks where you can know your bankers, what they are doing and where their reputations are their most important asset.

Protection #2:  Invest in Commodities and Add Defensive Hedges.  The price of everything in America is expected to rise.  This will push up the price of silver and gold.  An example of a defensive hedge is the AdvisorShares Ranger Equity Bear Fund.

Recently a lesson in our Purposeful investing Course said:

For clients who hold 65% or more in common stocks, we strongly suggest buying the Advisor Shares Ranger Equity Bear Fund (NYSE-HDGE).  Though not an inexpensive product (management fee is 2.9% per annum), this team-managed short-selling fund is unique in the ETF industry. The Fund’s investment objective is capital appreciation through short sales of domestically-traded equity securities. If you hold 65% or more in equities, we strongly recommend buying a 5% to 10% allocation to HDGE to help offset portfolio losses.

The intelligent strategy for growth-based portfolios is to buy the cheapest companies in the world accompanied by growing dividends. This ETF bets against the most expensive stocks.  Now because most of the US stock market is so expensive, this shorting option adds protection against a severe market crash.

The number two Golden Rule of Investing is “periods of high performance are followed by periods of low performance”.

The graph below shows how this ETF has performed very poorly over the last seven years, which is why it makes sense to invest in this safety investment now.

stock chart

Stock chart of HDGE AdvisorShares Ranger Equity Bear Fund (2)

Protection #3:  Use Math to Support Your Purpose and Spot Value.  Truly knowing ourselves is the most important part of investing.  When we don’t learn our limits as investors, it doesn’t matter how much we know about markets.  Emotions are the undoing of most investors!

Invest with Purpose.  All the events described above can destroy our purchasing power in the next four years.  The biggest risk is what we will do to ourselves when there is volatility.

A New York Times article “Aligning Your Investments with What Motivates You” explains the Alpha, Beta, Gamma, and Phi of investing. (3)  These measures  represent ways to judge investments.

The article says:  Alpha measures an investment’s performance against a market index.  If the Standard & Poor’s 500-stock index is up 10 percent and a mutual fund is up 15 percent, for example, that 5 percentage point difference is alpha.

Beta is the return of any given market. And charting beta is what a passive index fund does. Comparing different indexes, beta helps investors in deciding how to allocate their investments.

Then the article explains that Gamma measures the impact on returns of five areas more complicated financial planning; Optimal asset allocation, Dynamic withdrawal strategy, Guaranteed income products (i.e., annuities), Tax-efficiency, Liability optimization.

Phi quantifies how motivation affects long-term investment returns.  Phi is the factor that holds all the others together which we have been harping on Pi’s importance for decades.   Without a good Pi  ratio, its not likely that an investor will stick with the strategy that was created using Alpha, Beta and Gamma.

The financial giant, State Street Corp, did an 18 month study of 7,000 individual and investment professionals to get as better understanding of the role that Pi plays in making investment decisions.  The study examined what motivated a person to invest, or not, in the first place.

The study found that some investment motives are based on greed but most come from fear.  Use greed and fear to make investment decisions has a negative effect on long-term performance.

The study found that a deep sense of purpose is what caused a high phi score.

The article says:  “It’s not about outperforming markets or peers, and it’s not an asset-gathering measure of performance,” she said. “The performance has to be defined as sustainable and with a deeper sense of purpose.”

Most of us make good investment decisions but are not confident enough to stick to them.  Consequently we sell our winners too soon.  When we make poor decisions, we take them personally and hold onto losers too long.

This is why the study of 7,000 found that investors with socially responsible ideals did best.

The dual goal of profit and achieving some social benefit  provides a purpose beyond returns.  This brings comfort and determination to the investments.

Our Purposeful investing Course (Pi) helps improve the Phi of investing by teaching how to define three aspects of investing that are generally ignored; purpose, habits and incentives.

Learn to focus your investments using purpose as the most important investment goal.  The purpose of money becomes more important  the amount.

Learn how to create habits and routines that keep us on the path of our unique purpose.  The market will do all it can to distract us from our goals.  Understand that our banks, our brokers, the media, the government and commerce all have agendas to take our money away from us.   Habits and routines protect us from this.

Changing incentives to accomplishing a purpose instead of a numerical (percentage or profit) goal helps us adopt better behavior.  We react to accomplishing our meaningful purpose instead of drama created by media or short term whims in markets.

The study showed that changing incentives in this way improved phi when they had a meaningful impact on a person’s investment strategy.

The study found these facts: Every one-point increase in people’s orientation toward investment goals with a purpose — and the scale is 0 to 3 — equated to 42 percent greater odds that the investors know what they are paying in fees, 37 percent greater odds that investors are not rejecting their financial adviser, 38 percent greater odds that the people consider investing in socially responsible investments and 79 percent greater odds that investors will trade less frequently, the research found.

As in so many others cases, two of the most important factors of success are keeping costs and trading activity low.  These are among the most powerful ways to increase wealth.  Having greater fulfillment as well as more wealth is a bonus that we call “Everlasting Wealth”.

Whether you like to trade or hold, Pi helps you invest based on financial mathematical information rather than the spin, rumor and conjecture of the daily economic news.  Figure out what is really important in your life.  Find ways to invest in that purpose.  When you do, you’ll be on a solid path to everlasting wealth that is not so easily diverted by the daily drama that seems to be unfolding in the modern world.


(1) www.motherjones.com Trumps conflict getting worse

(2)  Stock chart of HDGE AdvisorShares Ranger Equity Bear Fund

3) WSJ.com Aligning investments with motivation

“If I Live Long Enough, I’ll Really Cash In Next Time”

Periods of good investing performance are always followed by periods that are bad.

Think about this…

The US dollar has risen over 50% above its lows of 2011.   The greenback is at its highest level versus the Chinese yuan since 2008.  India’s rupee is at an all-time low against the buck.  Other Asian currencies, the Singapore dollar and Malaysian ringgit have plunged to depths not seen since the financial crisis of 1997-98.  The euro, Mexican peso and Canadian dollar have crashed.  In other words, the US dollar is in a period of high performance.

What happens is the greenback is in a free fall.  Smart investors can cash in huge profits.

Yet there is a bigger economic problem that can ruin the purchasing power of your cash faster than you can imagine.

While the dollar was rising non US governments and businesses accumulated almost ten trillion dollars of debt denominated in US dollars.

The terror in this debt is that it acts as a destructive and very rapid financial amplifier.  Dollar debt is like a short position.  When the dollar rises, borrowers scramble to short-cover their position by selling their own currency.  This defeats the purpose of their hedging as it increases the strength of the dollar.  So they short even more.  Those short sales create an upward dollar spiral.  The buck rises higher and higher, based entirely on fear and speculation.

When that leverage energy is spent the currency stalls and plummets out of control… like now.

The last time we saw such a upwards spiral was from 1980 to 1985.  The dollar rose 50% in those five years.

Guess what?

Then it collapsed 50% in just two years.

The US dollar is in a similar position as at the beginning of Ronald Reagan’s first term in the 1970s.  This was a time of widening budget deficits, rising interest rates and a US dollar surge.  This created a problem then, as it does now, and creates huge opportunity for those in the know.

The rise of the dollar, the debt and the US stock market creates an especially dangerous conflict because Donald Trump wants to balance America’s trade.  A stronger dollar makes this impossible because it pushes up the cost of US material, US labor and US exports.

The overpriced dollar, the poor value of the US stock market (compared to other markets) create a dollar crisis and a special opportunity for you and me as investors.

“If I Live Long Enough, I’ll really cash in next time”.    I made this promise to myself in the 1980s.   A remarkable set of economic circumstances helped anyone who spotted them become remarkably rich.  Some of my readers made enough to retire.  Others picked up 50% currency gains.  I invested as much as I could handle then as the profits rolled in for about 17 years.  I had wished I could have invested more.

Now those circumstances are here again.

And I have…

invested more… a lot more… betting again the dollar.

The swollen stock market prices, huge dollar denominated debt and weakening dollar are three patterns that can create a fast 50% profit.

This is the most exciting opportunity I have seen since we started sending our reports on international investing ideas more than three decades ago.  The trends are so clear that I created a short, but powerful report “Three Currency Patterns For 50% Profits or More.”   This report shows how to earn an extra 50% from currency shifts with even small investments.

There is a way to accumulate good value equities denominated in the following currencies of special strength, including the Euro, Canadian dollar, Singapore dollar, British pound, New Taiwan dollar and Chinese yuan.

The report reveals 21 special non dollar equities that have the greatest opportunity for safety and appreciation.

I kept the report short and simple, but include links to 153 pages of global stock market and asset allocation analysis so you can keep this as simple or as complex as you desire.

The report shows 22 good value investments and a really powerful tactic to use that allows you to inexpensively accumulate these bargains now even in very small amounts (even $5,000).  There is extra profit potential of at least 50% so the report is worth a lot.

Research shows that most people worry about having enough money if they live long enough.   I never thought of that.   I just wanted to live long enough to see the remarkable economic opportunity that started in 1980 come again so I could hit the jackpot.  This powerful profit wave has begun.  I have made the investment myself  suggest you investigate this in my report “Three Currency Patterns For 50% Profits or More.”

Order the report here $29.95

My Guarantee

Order now and I’ll email the online report “Three Currency Patterns For 50% Profits or More” in a .pdf  file right away. 

I guarantee you’ll learn ideas about investing that are unique and can reduce stress as they help you enhance your profits through slow, worry free purposeful investing.  If you are not totally happy, simply let me know within 60 days and I’ll refund your subscription fee in full, no questions asked.

You can keep the report “Three Currency Patterns for 50% Profits or More”  as my thanks for trying.

You have nothing to lose except the fear.   You gain the ultimate form of financial security as you reduce risk and increase profit potential.

Order the report here $29.95

Or get this report free.  Subscribe to the Purposeful Investing Course (Pi) described below.