The Most Dangerous Financial Headline I’ve Seen Since 2008

Keith Fitz-Gerald Apr 10, 2015
63 

In my capacity as Chief Investment Strategist, I read newsfeeds from more than 100 sources every day. That helps me keep tabs on the Unstoppable Trends we follow here, what’s going on around the world, and, more importantly, discover opportunities for you that others don’t yet understand or even recognize.

Given everything going on – ISIS, Russia, Washington, fabricated economic numbers, earnings… you name it – it takes a lot to surprise me. I’m pretty jaded.

But a headline I recently came across stopped me in my tracks. Cold.

It was, by far, the single most dangerous story I’ve seen since the Financial Crisis began in 2008. Worse, it merited only a passing mention on Bloomberg. Not a single major U.S. network I’m aware of paid it any meaningful attention.

They should have.

What I am about to tell you is proof positive that big banks are not the bastions of stability and financial prowess many believe them to be at this stage of the “recovery.”

More to the point, big banks may harbor hidden risks and are not, as many analysts believe, the bright spot in this otherwise potentially disappointing earnings season.

Here’s that headline… and what it means for four bank stocks you may own.

This Small German Bank Just Put Up a Huge Red Flag

Last month, according to Bloomberg, the Association of German Banks (BdB for short) had to bail out German-based Duesseldorfer Hypothekenbank AG (DuessHyp).

Never heard of it? I hadn’t either… but here’s what you need to know.

Like many banks around the world that have made questionable investments, DuessHyp was facing write downs on debt it held. In this case, some €348 million (approximately $375 million) issued by Austria’s Heta Asset Resolution AG, which “blew up” – a banking term meaning failed – because of bad loans.

The scariest headline I’ve seen since the Financial Crisis:

“Heta Fallout Reaches DuessHyp as Fitch Sees Capital Gap Looming”

Source: Bloomberg

Theoretically, this isn’t a big deal. Every bank maintains reserves sufficient to deal with this kind of situation. Or at least they’re supposed to.

But, also like many banks, DuessHyp had been trading highly leveraged swaps, and that meant the Heta failure caused a hit to the bank’s reserves. Consequently, DuessHyp would have to post additional margin to maintain the highly leveraged trading positions on Eurex, Europe’s largest derivatives markets.

Only DuessHyp didn’t have it. So DuessHyp was forced to seek a rescue, lest the damage caused by Heta’s failure cause the bank to fail and the damage to spread throughout the European banking system.

I realize that all this can be hard to follow, so let me cut right to the chase:

  1. A bank almost nobody’s ever heard of before with a total capitalization of under €15 billion in assets and just 52 employees is suddenly deemed “too big to fail” and has to be rescued when it’s unable to post additional collateral on a mere €348 million in bad debt.
  2. The total notional value of derivatives exposure by U.S. banks was $240 trillion according to the Office of the Comptroller of the Currency (OCC) as of Q4/2014.

Contrary to what Wall Street wants you to believe, derivatives are not investments… in anything. Not stocks, not bonds, not currencies.

They are nothing more than legalized gambling, because they are wagers on the expected outcomes of specific events like the failure of Greece to secure sovereign financing and what happens to its national debt when that comes to pass.

It was the same thing for Ireland, Portugal, Italy, and several other countries during the depths of the Financial Crisis – bad debt and a lack of collateral to cover it when it went bad caused regulators and central banks to “rescue the system.”

So this begs the question. Why? Big banks make big bucks from trading this schlock. Meanwhile, everybody pretends like everything is okay.

Here’s where it matters to you and your money.

Derivatives Trading Is Not Only Still Happening… It’s Growing

Many analysts are expecting the “undervalued” financial sector to post positive profits this earnings season at a time when there will be otherwise disappointing earnings ahead.

Much of that will come from a “surprisingly robust mortgage business that bolsters earnings,” notes Paul Vigna of the Wall Street Journal. John Butters of FactSet observes that the financials may report positive earnings results reflecting as much as 8.4% growth.

At the same time, banks are planning billions in stock buybacks and raising dividends as a means of enticing skittish investors.

I think they ought to have their heads examined because the highly leveraged derivatives trading that got them into this mess is still out there… and growing.

Goldman Sachs, JPMorgan Chase, and Morgan Stanley had to alter their dividend payouts to pass the Fed’s (questionable) “stress tests.” Bank of America passed only provisionally.

Any big bank, no matter how tempting, is truly a case of “buyer beware.” Especially now.

Ironically, only one man on Wall Street seems to get this, and it’s somebody you’d least expect to raise the flag of caution. None other than JPMorgan’s CEO Jamie Dimon.

In a March 2015 letter to shareholders, he noted that the U.S. Treasury market’s freakish behavior last fall – which included a decline of 40 basis points, which is so many standard deviations from the norm that it should happen approximately once every three billion years – was the result of a foreseeable liquidity crunch. “We need to be mindful,” he wrote, “of the consequences of the myriad new regulations and current monetary policy on the money markets and liquidity in the marketplace – particularly if we enter a highly stressed environment.”

Many people think Dimon is the financial equivalent of Darth Vader. But I believe he may be the ONLY banker on Wall Street who fully understands the big picture. As such, he gives JPMorgan a decisive edge over the other big banks, many of which could be brought to the brink of collapse when the next bubble bursts.

Here are four banks that will learn the hard way – perhaps not tomorrow, or even next quarter, but sooner than most people think.

Banking Stock to Drop #1:

Deutsche Bank (NYSE:DB)

In the 2008-2009 crisis, Deutsche Bank stock lost 64% of its value. It’s seen an explosion of toxic derivatives since, becoming the most overleveraged holder of these “financial weapons of mass destruction” in late 2013. The bank’s total derivatives exposure is now greater than €52 trillion – or five times greater than the GDP of Europe, according to the company’s 2014 Annual Report, published March 2015.

Despite this massive undertaking of risk and exposure, DB ended 2014 without a lot to show for it. The company reported net revenues of €31.94 billion in 2014, up just 0.07% from the €31.91 billion achieved in 2013.

Banking Stock to Drop #2:

The Goldman Sachs Group Inc. (NYSE:GS)

A lot of people feel comfortable investing in Goldman because of the (not unfounded) perception that that the bank has U.S. legislators wrapped around its trading finger. After all, Goldman received $10 billion from taxpayers in the last crisis.

But GS shares still fell by 55% in that time period, despite the cash infusion. You may remember that its slide was arrested by none other than Warren Buffett, who pledged a $5 billion infusion in GS stock in return for a hefty 10% dividend yield on his preferred shares. Despite that big vote of confidence, it took the stock more than six years (until September 2014) to recover from the crash and reach its old July 2008 price.

Goldman Sachs has been secretive about the exact extent of its derivatives holdings, but the bank was reported to have derivatives exposure of $48 trillion by late 2013, and Bloomberg Businessweek reported that the bank plans to acquire derivatives even more aggressively going forward.

With its enormous derivatives exposure and extremely anemic stock performance in the midst of a historic bull market, Goldman Sachs is a banking stock to avoid.

Banking Stock to Drop #3:

HSBC Holdings plc (NYSE:HSBC)

Research shows that HSBC has $4.75 trillion in derivatives exposure as of December 31, 2014, according to the OCC. For a bank with $170 billion in market capitalization, that’s a staggering amount.

And the company’s leadership doesn’t inspire confidence, either. The London-based bank was ordered by French authorities yesterday to pay $1.07 billion in restitution following the investigation of alleged tax evasion in Switzerland.

The bank is appealing the ruling – and shares rallied 1.5% in the wake of the news. That’s a short-sighted rally, considering that the bank’s stock has shown itself to be especially vulnerable to crises that are becoming inevitable in the wake of the derivatives explosion. HSBC stock lost 65% of its value between September 2008 and March 2009 – and next time could be even more painful.

Banking Stock to Drop #4:

Citigroup Inc. (NYSE:C)

If you thought that the other three banks proved themselves to be vulnerable in the last financial crisis, just look at how the bubble ravaged Citigroup.

From July 2008 to January 2009, Citigroup lost 87% of its value, going from $205.10/share on July 1, 2008, to $25.30/share on January 1, 2009. In the six years since, it’s more than doubled from its 2009 nadir, but it’s still underperformed the gains of the markets.

This underperformance might be a key reason that Citigroup was ranked dead last in a comprehensive investing report released yesterday. The J.D. Power 2015 U.S. Full Service Investor Satisfaction Study surveyed 5,300 investors who have relied on guidance of advisory firms, ranking their satisfaction levels on a 1,000-point scale. The industry score average was 807; Citigroup came in last at 738.

Besides scoring low in its advisory service department, Citigroup comes up short in returning capital to investors, even compared with its notorious colleagues. Its 0.10% dividend yield is paltry compared to HSBC’s (9.90%) and even Goldman Sachs’ (1.30%).

One thing the company does have in spades is risk. With just under $2 trillion in assets, Citigroup has approximately $59 trillion in derivatives exposure, according to the OCC report.

In closing, I realize that I am bucking Wall Street here. But I’m okay with that because we’ve had a terrific run together making calls that they can’t fathom.

Remember, the banks, the regulators, our leaders, and the world’s central bankers want you to believe the financial sector is in good health because they want you to buy their shares and, by implication, reward their risky behavior. They hope that you will sign off on the fact that you can “safely” have a derivatives portfolio that’s hundreds of times bigger than actual total assets.

Fat chance.

Best regards for great investing,

Keith Fitz-Gerald

63 Responses to The Most Dangerous Financial Headline I’ve Seen Since 2008

  1. Barry says:

    Afternoon Keith

    What do u think of Bank Of America, it failed stress test yet I think Citibank Passed & its on your list

    Thanks

    Barry

    • gene nordell says:

      I also wonder about safety of Bank of America?

    • David says:

      Late last year Keith teamed up with James Rickards in a paper naming several Stocks to stay away from. In the financial sector, BAC and Citi were both ranked ‘supercritical’ (ie, sell these now.)

    • Joseph Jackson says:

      Buy FAZ. Short these idiots!

    • Bill Pederson says:

      During the 2008 decline , BAC had a horrific price pull back.. Does anyone think they have cleaned up their operation since then??
      As for Jamie Dimon and his Chase bank operation, he was a headliner on Yahoo news this week with a red flag warning for the market. So it’s BUYER BEWARE from one of the best in his field.

    • Fallingman says:

      BofA has a rap sheet longer than a street thug’s. Does that make any difference to anybody?

    • shawn says:

      B of A was the 1st Co. listed on the initial “Get Out” list they sent me!

  2. Matthew says:

    BofA passed provisionally.

  3. Kelly Smith says:

    Thanks for the heads up. Just purchased AINV for my financial diversification. I based this on your analyst advice as a play. Not trying to get off subject but what is your current opinion of TASR giving the most recent tragedy in South Carolina as an ignition point

  4. Jim Myer says:

    When in God’s name is our government going to put a stop to these banksters (gangsters)? People need to wake up.

  5. H. Craig Bradley says:

    B OF A

    Keith picked the worst banks to buy-into for his example, but I am sure Bank of America is right behind them. They trade lots of derivatives too and are vulnerable to losses when the next bubble bursts again. Depositors need to beware too and spread your cash around to avoid concentration. Insurance is fine, when it pays off.

    It might take more than 3 weeks next time. Indymac Bank of Pasadena was the first of its kind. Remember the long lines of depositors on a 100 degree day in August in front with the FDIC Notice on the front window (door) on television?

  6. H. Craig Bradley says:

    Anyone who invests much money in bank stocks after 2008-2009, particularly the ones Keith highlights, must have a “hole in their head”, as they say.

  7. Eugene says:

    How interesting and not to surprised. Question is do other company’s do things like this to boost their company’s too.
    Drug Co. , Food co. . and so on.
    Thanks.

  8. reuben abraham says:

    I hold the big banks responsible for the 2008-2009 meltdown and I’ve made a decision that never – ever to invest in any of them . I don’t want their stocks, I don’t want their dividends and also moved my accounts to a credit union bank. done with them and their out of control greed.

  9. Joe Buhler says:

    Does your colleague Shah Gilani know what you think of Jamie Dimon? I guess he’d be surprised!

  10. Raymond Austin says:

    The question is when or what will finally bring everything down to total Depression?
    What will be left of the world and who will own what?
    Thanks

  11. William says:

    Keith good article for those that would read and understand, getting deeper is something else that should be mentioned and maybe you can put sense to the whole picture for me and your readers. Wells Fargo is told that they have to go deeper in debt on there balance sheet so as they would be to big to fail. Why would they be against Wells Fargo being able to back up there debt with good deposits and instead want them to be just the opposite and that is so they are to big to fail. That is how it was presented and there are other large banks with way less % of deposits to back up there debt. What the Sam heck is wrong with that picture and you know the other banks that are up side down in there deposit ratio. Wait to hear your thoughts on something backwards as similar to your article. Thanks!
    +

  12. Ken says:

    Citibank and HSBC are in Canada as well . What can you advise about them in Canada and other big banks such as Royal Bank of Canada, Bank of Commerce and the Bank of Montreal. Any word from you on where they and any others sit, I’m very interested.

  13. Barbara Leonard says:

    The last time the banks were exposed in ’08 the market collapsed. With all the above information shouldn’t you just sell your stocks and put the money in a mattress. Or, with all this negativity do you just avoid investing in banks altogether?

  14. Sandra Loewen says:

    You better believe all those big banks know that selling derivatives is nothing more than gambling. I watched an excellent Frontline program on PBS that told the world just how greedy, power hungry and evil wall street truly is. And how it still has the American government in its back pocket even after it almost ruined the U.S. economy by bankrupting it through the sales of derivatives. I could not believe how these bastards could be so unconscionable towards their own people. They were and still are playing with the financial stability of the whole U.S. economy and its people. They don’t give a damn if everyone is thrown into the next great depression and the poverty that brings. I cannot believe that the U.S. government did not put the proper regulations and controls into place that would prevent this catastrophe from happening again. And it was a woman who warned about the dangers of derivatives!

  15. Geraldina says:

    I have always been leery about these 4 banks. Their leaders have big talks but don’t seem to perform as they say.
    That makes me feel suspicious. I refuse to have any of them in my folio.

  16. Thomas Schmidt says:

    Thanks for this alert Keith, Your news is always3 very informative.
    I believe that only stocks and bonds issued in the name of these banks are in jeopardy. I have always assumed savings accounts, checking accounts and CD’s up to given limits are still covered by the Federal Reserve.
    Should I worry about those also?
    Tom

    • Thomas Schmidt says:

      Thanks for this alert Keith. Your news is always very informative. I believe that only stocks and bonds issued in the name of these banks are in jeopardy. I have always assumed savings accounts, checking accounts and CDs up to given limits are covered by the Federal Reserve. Should I worry about those also?

      Tom

  17. Ken says:

    I can’t understand why anyone would buy stock in any American or European bank. I do not believe that the banksters understand anything about economics.They just sit behind their desks and look for ways to get more money. This is not responsible behavior, and I think they should all be tried, convicted and forced to join Bernie Madoff.
    Of course, I view current economics as “”eek-onimics.” It is so scary to see the ways in which the basic principles are being so vilely perverted. I am now waiting for the inevitable collapse of the world economy and with it the world’s governments. What no one cares to observe is that we have been pursuing the same basic economic approach that Rome did. The devalued their economy in order to pursue stupid and useless wars. The solidus began as a 100% gold coin, and it was debased over the years, and when it reached a .5% gold content, the Empire collapsed. The Germanic immigrants tried to save it, but the economy was too far gone.
    A couple of centuries later, the Byzantine emperor Alexios I Komnenos saw his empire headed in the same direction, so around 1100, he restored 100% gold coinage, and his empire continued for another 350 years until it was conquered by the Turks. I had to dig deeply into history to discover this, but I believe this deserves much more attention. It is such a valuable lesson. The problem is that nobody cares. They are too busy collapsing our civilization to care about real knowledge.
    The truth is that history goes in cycles of about 1500-1700 years. Over time governments become so big and so corrupt that the civilization must collapse. We could also learn from the Hindus. They see the entire universe as cyclical, and everything proceeds through four stages: development, stagnation, destruction and rebirth. Right now we are in the stagnation phase. One only has to look at events in Washington D.C. to understand this. We now live in a stagnation. What needs to happen is for working people to organize and take back the government, rather than following the destructive policies of the two main political parties. Otherwise, we are simply aiding and abetting in the destruction of our civilization. It still may not be too late, although the process now will be painful to everyone, but the price of inaction will be far worse.

  18. Edward Maddox says:

    Our government treated the “too big to fail” as needing rescue before. I wish they would get smart and let those failing FAIL Then maybe the survivors would stop the nonsense and act as intelligent humans who are in the banking business, not the gambling business. Of course our FED is pretty stupid too with all the fraudulent printing of money.

  19. Anand Bhatt says:

    Great summary on the banking industry,mwhich has been touted in the news as one that will reap huge benefits this year and the coming years. However, your pointing out their exposure to derivatives brings to light something that is not talked about in the right perspective. I have, after reading your article decide to go with JPM when I do trade any of the banks.

    Your recommendation on TREX was very timely and I traded it within 20 minutes of receiving your e-mail. The best part about this trade was not that I profited nicely that day but when I reviewed the daily, weekly and even the monthly charts, the RSI(14) for every one was above 70. making it difficult to exit. Finally, the 5 minute chart showed me the way and I exited at 57. Thank you. I will trade it again next week, because I believe the Aroon indicator is still strong.

    Sincerely,
    Anand

  20. Arthur Caponegro says:

    Anyone who believes in the economic numbers coming out of Washington DC also believe in Santa Claus. This market is headed for a good 30% correction. The Federal Reserve is BROKE. Tell me how they are going to pay back 20 Trillion dollars of debt along with 20 trillion dollars of debt in the private sector and if you can convince me, then I will start believing in Santa Claus too along with the Fairy Godmother. Bush was the cake, Obama is the Icing on the cake and he makes James Carter look like a genius. This country should throw out the present political system which only serves self-interests, not the PEOPLE . Adopt something like the Roman system of a council of elders. You wouldn’t have as much corruption in government.

  21. Jim Fisher says:

    I have heard this in passing. Several local banks have merged. Huntington, citizens in Ohio for a few. Spending and mortgaging with 0% for many years and homes 2.3% for years says something is happening. Also, too many people on government assistance that stats don’t show. Something is going to happen.

  22. Claire Berke says:

    thanks for the comments on the Banks I did not know about GS or Citibank.Where else is it safe to put my money. I don’t think that Chase or WEls Fargo are any better.

  23. NMSoria says:

    Keith: How could these banks allowed exposure to derivatives over and above their assets value? You mean to say, what is that difference between the derivative exposure and their assets value? Is it a sort of liability or promissory account? What is it?

    If that is the case, when their bets on derivates go against them, your analysis that these banks will fail will surely happen. Where are the banking regulators? Why did they allow this to happen?

    Please enlighten me if my anology is right.

    Thank you,
    NM Soria

  24. Donakd says:

    Where would would you place Barclays Bank in the light of what you have written

  25. Hapuna says:

    Will thee fools never learn? The answer is rhetorical. Of course they will never learn. The system works for them….
    until it doesn’t. Then they get bailed out. By none other than YOU AND I!
    So, what is our alternative to investing in a sinking ship?
    Buy vacant prime farm land.
    Buy stock in potash miners.
    Buy physical gold and silver.
    Buy bullets for your guns.
    Have a place to weather the meltdown that is safe and far from ground zero, Wall Street and Washington.
    And last, Have a year’s supply of food and water set aside in your safe haven.
    Oh, and of course, have a absolutely sure means to exit and get to your safe haven.
    Think I am exaggerating?
    I sure hope I am.
    But what do you lose by being prepared to weather a storm?

  26. SO says:

    I’m not surprised, these clowns will never change as long as their tails are bailed out when they screw up.
    like being rewarded for trashing the treasure they have been trusted to protect. HSBC or whatever their letters are, took over my bank in england where i had savings account for 40yrs. They told me my money had been put in an account called suspended, therefore not earning any interest and if i wanted what was left in it, i needed to send them a letter with my local banks letterhead on it. They are theives and took the account from me along with interest they owed me. They said they tried to contact me for six months. Wonder how this letter found me? I hope they go belly up and have to pay for their greed! I bank at a credit union and don’t trust any of them.
    regards, SO

  27. guest says:

    Although I agree with the thrust of your article, I would not equate derivatives used for the purpose of hedging as “gambling.”

  28. RJ says:

    Thank you, Keith.

    Are they Banksters or Gangsters?

    Legal Gangsters, of course.

    It was clear that the derivatives bubble was at the core of the 2008 panic. After being propped up with Fed infusions, failing to mark their (toxic) assets to market, and creative accounting, a year later the banks were touting profitability!

    It’s all a ruse, and we’re being lied to. Again and again.

    And let’s not forget when Henry Paulson stepped in with TARP. In his press conference after the bank bailouts he refused to tell us who received another 2 trillion of Federal Reserve money. It simply vanished, without a trace or an explanation.

    And what about Donald Rumsfeld? On September 10, 2001 he announced 2.3 Trillion in “missing transactions” from the Pentagon.

    Now, if you or I did business like the banks or couldn’t account for “missing transactions” to the IRS, we go to jail. Right?

    Keith, please do an article about the government bubble. How can we keep spending what we don’t have? Or is Dick Cheney right when he said “deficits don’t matter much”?

  29. Sheila says:

    Does this apply to all banks worldwide? Canadians have always felt comfortable with investments
    in their banks. Also, any Canadian recommendations in Canada when I sell bank stock?
    Thanks

  30. Placide Gagne says:

    Keith
    NO. The so said “intelligent people or business bankers” are not dead and are still alive, AND, mostly, they still are taking IDIOT BUSINESS DECISIONS. Year 2008 of the foolish derivative papers taken at that time effects (losts) are not remembered by them. I try not to invest in those kind of companies, but many people do. !!!!!!!!!!

    You know. As long as the governments peoples continue to SAVE the big banks, even if they continue to take those bad decisions, we will continue to suffer, because of their bad actions.
    Bye
    Placide

  31. Jeff in Canada says:

    Please help me to better understand this derivative risk that the banks have. If the banks are betting one side of a risk, then who is betting the other side of the risk? Are they betting against each other? It would seem to me that their bets could either pay out to them handsomely or else sink them totally, depending on their side of the bet. Is there any way to know the breakdown of the bets they have, for instance: how much is covering their exposure in the mortgage market, or the credit card market, or sovereign debts, etc. ?
    It would seem to me that these questions are paramount to determining an investors risk. I understand that these derivatives are not regulated but there must be some information available to the average investor.

  32. John van den Heuvel says:

    What is the exposure from derivatives for the Canadian Banks trading also in New York .At one time The Canadian Imperial Bank of Commerce
    had liabilities in derivatives far greater then their Capital Tier 1 and 2 and one year profits. Much of their risk then were kept of balance sheet.

    I am sure Bank of Nova Scotia and Royal Bank of Canada are also trading large amounts in derivatives. Only T.D. Canada Trust seem to have
    skirted the bullet in 2008 as the than C.E.O. was not familiar with derivatives,

  33. stafford says:

    what about canadian banks

  34. Edward Mills says:

    I have focused on the # $240 trillion of derivatives. Last fall a neighbor ran up to me about the latest Michael Lewis adult horror fiction on derivatives and the mortgage meltdown.. I told him I thought I had read that it was $50 trillion world wide which would suggest that the housing crisis was not the consequence of derivatives per se but of the underlying subprime mortgages. And what nearly all commentators have missed was that there were some $6 trillion of government sponsored minority lending mandates as of 9/30/2007 consisting of $4.5 post 1994 CRA Mandates (google that for an eye-popping, mind-boggling, jaw dropping report!!!) plus $2.4 trillion of HUD imposed mandates on Fannie Mae and Freddie Mac. Eliminating the overlap between the two mandates leaves about $6 trillion.

    Total mortgages outstanding nearly tripled between 1997 and 2007, rising by $7.3 trillion. This compares with total mortgaqes outstanding of $3.9 trillion in 1997 of which banks accounted for only $1.3 trillion.

    So how was the $7.3 trillion financed. The Fed’s easy money policy not only expanded the domestic money supply but ignited a world wide monetary explosion. The dollar dropped some 24-30 percent against the Euro (depending on where one places the goal posts) and substantial sums flowed from European banks into housing markets world wide as well as into sovereign debt. Foreign money accounted for about a quarter of the funds flowing into the housing market as investors reached high for yield to overcome historically low interest rates.

    I have been studying the housing crisis/Great Recession since November 2011 and am struggling to write a very comprehensive book which will be entitled “How Bill Clinton Caused the Great Recession and Crippled the Economy.” It will detail the role of the Fed as a co-conspirator. However, the underlying thesis is that Clinton and the Fed handed control of the banking system over to housing activists who proceeded to milk the banks for $4.5 trillion (that’s “trillion” spelled with a “t”) of minority lending commitments. What is not appreciated is that Bill Clinton pursued a “third way” policy intended to revitalize decaying inner city neighborhoods, expand minority businesses and to allow subprime households to achieve the American Dream of home ownership. In addition, he created “Empowerment Zones,” “Community Development Zones,” etc. To achieve his “Third Way” agenda he launched a blitzkrieg assault on the mortgage lending industry – the banks, mortgage brokers and Fannie and Freddie.

    It is not possible to talk intelligently about the current global situation without an appreciation as to the impact of Clinton’s “Third Way” and the Fed’s role. In effect, the Fed cooperated with Clinton’s “Third Way” agenda but applying maximum pressure on the banks to negotiate with the activists and by the impact that its loose 2001-2006 monetary policies had on the global economy.

    I would urge everyone to download the series of reports by Claudio Bario, research director of the Bank for International Settlements. He had been warning since 2001 of the global impact of loose monetary policies would have on the global economy. He is particularly critical of economists such a former Fed Chair Ben Bernanke who simply focus on the trade surplus of the surplus exporting countries such as China, India, Japan, Saudi Arabia, etc.
    Instead, he argues that we should focus on the FINANCIAL FLOWS. The world-wide global capital surplus is estimated at around $300 trillion compared with a value of less than $70 for global economic activity. The sloshing around of so much capital can have substantial effects.

    I have been writing on this subject for the past few years. Anyone interested in reading what I have written so far can contact me at ted_m24@yahoo.com

  35. Rutlledge St.George says:

    The individual investor is sitting on the sidelines with their funds in the bank earning zero interest. This worldwide phenomenon called investing is awe inspiring. We do not have the capability to fathom it and as it would seem neither does anyone I hear from using the financial news network. It is in a cauldron of data, always changing colors and moving fast and slow and changing temps and it goes and goes up and down.

    All that is needed to change directions is for some large institutional investment firm with large trading ability and a computer driven impetus to start selling and away it goes. There is a timing arrangement involved in this and the average investor does hot have this combination.

    I have been following the market for over 30 years and just recently decided to keep my funds out of this crazy market. I have other things to do with my funds, and I am doing well.

  36. Dr. Suzanne J. Hill says:

    This is all very scary to me, but I have been expecting it to happen for a long time.

  37. Timothy Ludolph says:

    Another great article under your new format. I think of you as you spoke of Dimon- as the only one I have noticed that is ringing the alarm beels about the precarious position of the Banks as well as parts of government that are extremely unstable. Jim Rickards is another warning about fiat currency being wiped. I don’tnow if you agree with his point, but it shows very few willing to help the retail investors that you serve. Thank you for your honesty.

  38. Bob W says:

    Would you suggest writing long term puts re: these banks

  39. Robert says:

    The problem is that the bad banks represent collateral for the “good?” banks. If the collateral is bad, all the banks and the world have a BIG problem.

  40. Bill says:

    how about listing what will be the safe banks

  41. Wade says:

    Barry, I wouldn’t be owning BoA, if you paid me. Nonetheless, great question for Keith.

  42. yngso says:

    Not so long ago I read an article that expressed admiration for how an important bank was doing the same kind of stuff that brought on the 2008 crisis.
    I immediately commented and asked if this really could be described as a good thing.
    The bank was DnB, the biggest bank in Norway. It’s not so big in a worldwide context, but I think maybe that it collapsing would have a bigger effect than if the German bank that Keith mentioned should collapse. Oh yes, banksters everywhere are at it big time. The money’s too good, temptation too great, and greed takes over…

  43. Alan says:

    When this thing blows up how far into the overall market will it reach? You are not just warning of financial stocks are you? What do expect will be the response from the Fed?

  44. Michael says:

    Hello Keith,

    Very few people will remember Creditanstalt, a small(ish) Austrian Bank that went bust in 1932 owing to bad loans and the French suddenly pulling their deposits to spite the German depositors and lenders. The effect on German banks and then UK and US banks has been credited with extending the Great Depression by a number of years (until 1940).

    You could be right that “nobody can fail” is the new “too big to fail”

    Regards,

    Michael

  45. Tom Stanley says:

    For income and a living, being unemployable so essentially retired. I went to investments full time and If I say so myself haven’t done too bad, actually pretty good, but of course not as good as I want. I have made it a rule to primarily invest in dividend or distribution paying stocks, that have a decent future, as I won’t be around long enough for growth stocks to mature and reap there rewards. Also, al song as the dividends keep coming I am not affected by market fluctuations.
    For income I have primarily, but not solely, chosen MLP’s & DPP’s because of their distributions and their tax advantages and am leaning heavily in the oil arena. Probably 60 – 70 present of my portfolio is in some way related to oil & gas.
    Besides being a Passport Club member I hope to join the Monty Map Project this spring.
    Is my portfolios agenda for everyone, absolutely not. Does if work for my purposes, yes it does. Also I am trying to construct my portfolio to be a bullet proof as possible as it is also being designed to be passed on. That is why I am looking to get a piece of the graphene market.
    Right or wrong; most of the distributions go to my broker where they collect; I remove living expenses then reinvest in new or increased holdings, continually building the portfolio.
    If you see problems or have suggestions I would be very grateful for any comments or suggestions. Even though I am a bit of a contrarian it seems but I do require and welcome guidance.

    • alicia says:

      I am doing the same type of investing. Only those with dividends or distributions like MLPS.
      I have also a ROTH. No more traditional IRA. I put the MLPS on the taxable account and the highest yielding stocks in the ROTH. I do not re-invest the ROTH. I use the proceeds for living expenses. I include TRUSTS and BDCs, and the stock version of an MLP, like AMLP

  46. Stan says:

    What contra ETF might you recommend to hedge the risk to the market.

    Thanks, Stan

  47. Roy says:

    How do the Four Big Australian Banks Stand in comarison , NAB, WESTPACK, A&Z, & CBA, Roy.

  48. Bob Lucas says:

    If I had the chance to own a dead fish or Bank of America Shares – I would take the dead fish…

  49. leon flynn says:

    keith i am going with your recomendations but worry about pimco in mm top 50 ??

  50. Sandra Gustafson says:

    Keith:

    I am extremely new to investing, and as such, I find myself spending several hours, 6 days a week, studying and/or researching information that crosses my path. Of some annoyance, is that I am constantly being bombarded with solicitations, requesting that I purchase a subscription or software program regarding this industry (which I have declined on a regular basis).

    HOWEVER, when an article popped up while doing some research, it lead me to a link about MONEY MAP and an article written by yourself. I was so impressed with it and what you had to say, that I immediately purchased a subscription, that day, in May of 2015. Four months later, on September 30th, I opened a brokerage account and deposited $5,000 (laughable I know). Here is what followed, utilizing your recommendations and/or ideas:

    Between October 5th and October 15th, I have made a total of 8 trades, with 8 winners, with the transactions consisting of approximately 75 shares. Each time I went “short” on the trade (no options—-definitely not ready for this yet) and closed out each trade after holding said stock for an average of 18 hours. In every “position”, I exited too soon, but I remain happy with EVERY ONE of those trades being a winner PLUS realizing gains of around 6%. I am sitting on a 9th trade that I hope will boost my gains to 16%.

    I just wanted to say ‘THANK YOU” and it was the BEST INVESTMENT I made when I obtained a subscription to MONEY MAP. Perhaps other people like myself, who are extremely small players in this game, can profit too…..

    Sandee

  51. Neil Lande says:

    I have followed Jamie Dimon for many years and I think he is the smartest banker in the country.
    As a matter of fact, MS investment arm manages my securities portfolio and we are very pleased.
    Neil Lande
    .

  52. Neil Lande says:

    I have followed Jamie Dimon for many years and he is the smartest banker in the country.
    MS investment arm manages my portfolio and I am very pleased.
    Neil Lande

  53. James says:

    Great article! Great comments!

    One simple solution to make our global economy safe: Outlaw derivatives.

    Derivatives are the Achilles heel that have the potential to cause catastrophic economic destruction.

  54. Bah+Humbug don says:

    Keith
    tell me about the banks, you are spot on.
    in phoenix my bank closed about 10 windows and only have two open
    I was in San Antonio texas a couple of months a go same thing.
    when I talk to a representative , you know the ones that have there private offices that are partitioned off
    I tell them to start looking for another job. ha they are in total denial .
    bah humbug don

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