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Lessons For US Citizens From The Deposit Confiscation In Cyprus

Submitted by Simon Black of Sovereign Man blog,

It was almost exactly one year ago to the day that an entire nation was frozen out of its savings… overnight.

Cypriots went to bed on Friday thinking everything was fine. By the next morning, they had no way to pay bills or buy food.

It’s certainly a chilling reminder of how quickly things can change. And why.

The entire crisis sprang from a mountain of debt. The government had accumulated too much debt. The banking system had accumulated too much debt.

And banks had lost a lot of their customers’ money making risky, stupid bets on things like Greek government bonds.

By March 2013, Cypriot banks were almost entirely devoid of cash.

Sure, customers could log on to a website and check their bank balances.

But there’s a huge difference between a number displayed on a screen, and a well-capitalized bank that actually holds abundant cash.

The government was too insolvent to bail anyone out. And as a member of the eurozone, Cyprus didn’t have the ability to print its own money.

So they did the only thing they could think of– confiscate customer deposits.

And they imposed capital controls on top of that to make sure that people couldn’t withdraw their remaining funds out of the banks as soon as the freeze was lifted.

It was a truly despicable act. But again, even though it all unfolded overnight, the warning signs were building for at least a year. Especially the debt.

When countries, central banks, and commercial banks accumulate too much debt, and specifically too much debt relative to assets, you can be certain there is trouble ahead in the system.

Think about it like your own personal finances. If you have a million dollars in debt, that seems like a lot. But if you own a home worth $5 million, you are still in good shape financially.

If, on the other hand, you have a million dollar mortgage for a home that’s worth $250,000, you’re in deep trouble.

The US government’s official, ‘on the books’ debt now exceeds $17.5 trillion. This is an enormous figure.

If the Uncle Sam just happened to have $20 trillion or so laying around, however, this debt load wouldn’t be a big deal. But that’s not the case.

By the US government’s own admission, their own financial statements show net equity (assets minus liabilities) of MINUS $16.9 trillion.

That’s including ALL the assets: Every tank. Every bullet. Every body scanner. Every highway.

Then you have to look at the Central Bank, which is itself teetering on insolvency.

The Federal Reserve’s balance sheet has exploded since 2008, and right now the Fed’s net equity (assets minus liabilities) is about $56 billion.

That’s a razor-thin 1.34% of its $4 trillion in assets (it was 4.5% before the crisis).

Here’s the thing: in its own annual report, the Fed just admitted that it had accumulated ‘unrealized losses’ totaling $53 billion. This is almost the Fed’s ENTIRE EQUITY.

So in the Land of the Free, you now have an insolvent government and insolvent central bank underpinning a commercial banking system that is incentivized to make risky, stupid bets with their customers’ money.

To be fair, I’m not suggesting that bank accounts in the US are going to be frozen tomorrow morning.

But a rational person should recognize that the warning signs are very similar to what they were in Cyprus last year.

And if there is one thing we can learn from the Cyprus bail-in, it’s that it behooves any rational person to have a plan B, even if you think the future holds nothing but sunshine and smiley faces.

Having a plan B can mean a lot of different things depending on your situation– moving some funds abroad, securing a second source of income, having an escape hatch overseas, owning physical gold, holding extra cash, etc.

You’re not going to be worse off for having a plan B based on the possibility that there -could- be some problems down the road.

But if those consequences are ever realized,and Plan B becomes Plan A, it might just turn out to be the smartest move you’ve ever made.

If you think this makes sense then I encourage you to sign up for our free Notes From the Field if you haven’t already done so, and you can also share this article with your friends below so they’re not without a plan B if things do take a turn for the worse.

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Kermit Kaption Kontest

Today Kermit rang the bell for the NYSE. That is all.

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Stocks Soar On Crimean Referendum, Russian Sanctions

The Dow has retraced half of last week's losses as exactly what everyone expected (a "yes" vote followed by US/EU sanctions and no actions yet by Putin) occurred. The S&P was ramped thanks to the always-happy-to-help EURJPY back into the green for 2014. The big ramp occurred heading into the US open to spark momentum and save the day but weakness into the close suggests that the early short squeeze ran out of ammo relatively quickly. Volume overall was weak today. VIX's notable divergence from Friday likely provided some of the ammo for the early ramp. Gold and Treasuries were relatively unimpressed by equity exuberance until Europe closed and then were sold quite notably (TSYs +3-4bps, Gold/Silver -1.4%) Late-day weakness pushed Nasdaq back to unchanged post-Putin's conference call.

The Dow has recovered half of its losses..

But EURJPY was in charge…

But it seemed the action hotted up outside of stocks as Europe closed…

We suspect the hedging efforts into the close on Friday provided some notable ammo for the early squeeze..

And the early squeeze gave planty back into the close…

Copper and Oil rallied post-European-close as Gold and Silver sold off tick for tick…

Charts: Bloomberg

Bonus Chart: Russians are loving the sanctions…

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Did SF Fed’s John Williams Just Predict The Next Recession??

Submitted by Lance Roberts of STA Wealth Management,

There are three things that are often spotted, widely believed, and actively sought after with little evidence they actually exist: Big Foot, Ghosts and Economic "Soft Landings." If you are interested in the first two, you can catch weekly episodes of Animal Planet's "Search For Bigfoot" and SyFy's "Ghost Hunters." The funny thing is that both of these shows remind me of "Get Smart" because when it comes to actually finding any real evidence it is always "missed it by this much."

When it comes to "economic soft landings" the story line is really changed that much. By definition an economic soft landing is:

"The process of an economy shifting from growth to slow-growth to potentially flat, as it approaches but avoids a recession."

The chart below is the annual change in economic growth from 1854 to present with recessions identified.

Over the past 159 years, there is not much evidence that an economic "soft landing" has ever occurred. However, it is not without precedent that as the economy reaches the latter stage of the growth cycle that the words "soft landing" are uttered by economists and Federal Reserve members.

In 1999, according to the FOMC minutes, Ms. Johnson stated in her remarks:

"Provided foreign officials do not unnecessarily limit output growth from achieving its new potential, such a development could result in stronger demand for U.S. exports and more balanced growth in the global economy. Such a scenario is one version of a so-called soft landing."

In the August, 2000 FOMC press release Alan Greenspan stated:

"The incoming data seem to have convinced participants in the financial markets that the odds of a soft landing have risen."

Then again following the September 2000 FOMC Meeting:

"Financial market participants seem to be reading the recent economic data as further confirmation that a soft landing is in train."

Of course, as we know now, the recession soon followed in 2001.

One of the things you have to admire of those that hunt for ghosts, "Big Foot" or aliens is that they live by the "Jason Nesmith" motto of "Never give up…never surrender."

Apparently, the same holds true for the members of the Federal Reserve as during the December 12, 2006 FOMC meeting, the now Fed Chairwoman, Janet Yellen remarked:

"In summary, I continue to view a soft landing with moderating inflation as my best-guess forecast, conditional on maintaining the current stance of policy. But there are sizable risks on both sides to the outlook for growth, and the downside risks are now more palpable."

Followed by then Chairman Ben Bernanke:

"So like most people around the table, I think that a soft landing with growth a bit below potential in the short run looks like the most likely scenario."

Of course, it was just 12 months later that the US economy dipped into the worst recession since the great depression.

Why do I bring this up? Bihnamin Appelbaum, via the New York Times, recently interviewed John Williams, the President of the Federal Reserve Bank of San Francisco, who stated:

"John Williams, president of the Federal Reserve Bank of San Francisco, is feeling pretty good about the economy. He is ready to continue the Fed’s retreat from bond-buying and forward guidance. And he says he’s optimistic that this time, the Fed will manage to produce a soft landing."

However, Bihnamin understands that "soft landings" are rare and gives John a chance to extract himself:

Q. You've said several times during our conversation that we're returning to normalcy. A lot of people are uneasy about the Fed's ability to manage that return.

A. I think we've got significant challenges ahead of us that are far greater than normal periods of monetary policy. Not only the communication around the taper but more generally that whole exit period of moving from zero interest rates after many, many years, and what happens to our balance sheet, these are clearly big issues that are ahead of us and getting the soft landing right is very difficult.

Q. But the Fed almost never lands softly.

A. Maybe this will be the one time we have a soft landing. We haven't had a lot of breaks in the last few years."

If history serves as any guide, John's prognostication started a 12-18 month countdown to the next recession. Of course, as John suggests, "this time could certainly be different." As I wrote previously:

"The next major market correction will very likely coincide with the next economic recession. Of course, by simply writing the 'R' word this article will be summarily dismissed by the 'financial illuminati' who continue to marvel at the day to day levitations of the markets with the inherent belief 'trees can grow to the sky'. Ultimately, all economic recoveries will eventually contract. The chart below shows every post recession economic recovery from 1879 to present.

The statistics are quite interesting:

Number of economic recoveries = 29

Average number of months per recovery = 39

Current economic recovery = 57 months

Number of economic recoveries that lasted longer than current = 6

Percentage of economic recoveries lasting 53 months or longer = 24.14%

Think about this for a moment. We are currently experiencing the 7th longest economic recovery in history with most analysts and economists giving no consideration for a recession in the near future."

While there is always the possibility that ghosts are real, "Big Foot" is alive and a "soft landing" will be achieved, there is just precious little historical evidence to support that claim. Unfortunately, such claims of a "soft landing" have always come just prior to recessions as any claim different by a Federal Reserve member would likely spark a panic in the financial markets accelerating a recessionary event.

What it does suggest is that the Federal Reserve is far more worried about the current economic state than what they reveal. For the Federal Reserve, "forward guidance" is their "Omega 13." The hope of is that communication can put the markets, and economy, on a controllable "glide path." The problem is that in order for forward guidance to work you have to make the assumption that the Federal Reserve, through monetary policy, can control, or potentially eliminate, real economic cycles.

Is that possible. Sure. Historical probabilities suggest something far different. Regardless of the outcome, just remember to "Never Give Up, Never Surrender."

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UBS Investigated For Gold Manipulation Suggesting Gold Inquiry Goes Beyond London Fix

The last time the FT penned an article on the topic of gold manipulation, titled “Gold price rigging fears put investors on alert” it was promptly taken down without much (any) of an explanation. Luckily, we recorded the article for posterity here. Earlier today, another article on the topic appears to have slipped through the cracks of the distinguished editors of the financial journal that enjoys the ad spend of the status quo, when it reported that “Gold pricing scrutiny widens”, hardly an update that will take the world by storm, however it is notable that “even” the FT, where for years goldbugs claiming gold manipulation had been ridiculed, is finally start to admit the glaringly obvious.

In this case, the FT looks at one of the most habitual and recidivist manipulators of practically every asset class that the market has ever known, Swiss bank UBS, better known as the rat that is allegedly perfectly happy to expose all other manipulators in exchange for immunity, and focuses on the Friday’s admission by UBS in its 2013 annual report: “that a review of its foreign exchange operations has been widened to include its precious metals business. In the report, the Swiss bank said: “Following an initial media report in June 2013 of widespread irregularities in the foreign exchange markets, UBS immediately commenced an internal review of its foreign exchange business, which includes our precious metals business.”

And while it was recently revealed that there has been unprecedented collusion and rigging of gold at the time of the London fix, the latest revelations confirms that the inquiry is going beyond merely what the venerable five member banks of the London Gold Market Fixing Ltd, on the premises of N M Rothschild & Sons: after all UBS is not part of this particular criminal syndicate, which at last check included Barclays, Deustche (soon to be replaced by Standard Bank which is merely a front for China’s ICBC), Bank of Nova Scotia, HSBC and SocGen.

An invaluable lesson for U.S. Citizens from the bank confiscation in Cyprus

It was almost exactly one year ago to the day that an entire nation was frozen out of its savings… overnight.

Cypriots went to bed on Friday thinking everything was fine. By the next morning, they had no way to pay bills or buy food.

It’s certainly a chilling reminder of how quickly things can change. And why.

The entire crisis sprang from a mountain of debt. The government had accumulated too much debt. The banking system had accumulated too much debt.

And banks had lost a lot of their customers’ money making risky, stupid bets on things like Greek government bonds.

By March 2013, Cypriot banks were almost entirely devoid of cash.

Sure, customers could log on to a website and check their bank balances.

But there’s a huge difference between a number displayed on a screen, and a well-capitalized bank that actually holds abundant cash.

The government was too insolvent to bail anyone out. And as a member of the eurozone, Cyprus didn’t have the ability to print its own money.

So they did the only thing they could think of– confiscate customer deposits.

And they imposed capital controls on top of that to make sure that people couldn’t withdraw their remaining funds out of the banks as soon as the freeze was lifted.

It was a truly despicable act. But again, even though it all unfolded overnight, the warning signs were building for at least a year. Especially the debt.

When countries, central banks, and commercial banks accumulate too much debt, and specifically too much debt relative to assets, you can be certain there is trouble ahead in the system.

Think about it like your own personal finances. If you have a million dollars in debt, that seems like a lot. But if you own a home worth $5 million, you are still in good shape financially.

If, on the other hand, you have a million dollar mortgage for a home that’s worth $250,000, you’re in deep trouble.

The US government’s official, ‘on the books’ debt now exceeds $17.5 trillion. This is an enormous figure.

If the Uncle Sam just happened to have $20 trillion or so laying around, however, this debt load wouldn’t be a big deal. But that’s not the case.

By the US government’s own admission, their own financial statements show net equity (assets minus liabilities) of MINUS $16.9 trillion.

That’s including ALL the assets: Every tank. Every bullet. Every body scanner. Every highway.

Then you have to look at the Central Bank, which is itself teetering on insolvency.

The Federal Reserve’s balance sheet has exploded since 2008, and right now the Fed’s net equity (assets minus liabilities) is about $56 billion.

That’s a razor-thin 1.34% of its $4 trillion in assets (it was 4.5% before the crisis).

Here’s the thing: in its own annual report, the Fed just admitted that it had accumulated ‘unrealized losses’ totaling $53 billion. This is almost the Fed’s ENTIRE EQUITY.

To be fair, I’m not suggesting that bank accounts in the US are going to be frozen tomorrow morning.

But a rational person should recognize that the warning signs are very similar to what they were in Cyprus last year.

And if there is one thing we can learn from the Cyprus bail-in, it’s that it behooves any rational person to have a plan B, even if you think the future holds nothing but sunshine and smiley faces.

You’re not going to be worse off for having a plan B based on the possibility that there -could- be some problems down the road.

But if those consequences are ever realized,and Plan B becomes Plan A, it might just turn out to be the smartest move you’ve ever made.

March 17, 2014
Dallas, Texas, USA

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Law Schools Now Paying Their Graduates’ Salaries To Improve Rankings

Submitted by Michael Krieger of Liberty Blitzkrieg blog,

I knew that the legal market was in bad shape last summer when I came across the story that top law firm Weil, Gotshal & Manges announced its first mass layoffs in 82 years, but I had no idea it was this bad.

As most of you will be aware, U.S. News & World Report publishes a widely anticipated ranking of undergraduate as well as graduate schools. I recall how closely my peers scrutinized these rankings back when I was a high school senior and, apparently, a similar obsession continues to this day.

In fact, law schools are so consumed with performing well in these rankings that they are going to outrageous lengths to make it look like their students are performing better financially after graduation than they actually are. One of the most ridiculous ways they achieve this is by paying the salaries of their graduates upon graduation. This way, students can take on employment at non-profits and government agencies, positions they would never otherwise consider in light of their mountains of student debt. In return, their alma maters can pretend their graduates got real jobs. It is the academic equivalent of GM automobile channel stuffing.

This isn’t just a minor trend of one-offs being exaggerated by the media either. For example, George Washington University paid the starting salaries of 22% of its graduates in 2012, while the University of Virginia paid for 15%.

These programs even have a name that reminds me of a financial derivative packed full of worthless securities. These programs are being called “bridge to practice” schemes and according to The Economist “in a recent survey by the National Association for Law Placement (NALP), 45 of the 94 schools that responded now run such programs.”

Now more from The Economist:

EACH YEAR when U.S. News, an American publisher, releases its league table of law schools, potential students seize on it and the universities decry it for oversimplifying a personal and unquantifiable decision. But the schools can ill afford to ignore it, since not just applicants but donors and even credit-rating agencies pay close attention to the scores.

Among the ranking’s most important components is the share of graduates who find jobs. The 2014 table, announced on March 11th, shows that the University of Virginia (UVA) and George Washington University (GW) do especially well on this. Although UVA’s law students are only in ninth place for their scores in standard admission tests, 97.5% of the class of 2012 had a job on graduating—the best mark in the country. At GW the discrepancy was even more striking: its 85% graduate-employment rate ranked ninth, whereas its admission-test scores were 21st.

However, the two schools’ performance is not as stellar as it seems. A close look at the online employment database of the American Bar Association reveals that GW and UVA are among the leaders in a striking trend: law schools paying the salaries of their alumni when they go to work in legal firms, non-profits or the government. GW paid the starting salaries of a whopping 22% of its 2012 graduates; at 15%, UVA was not far behind.

With demand for newly minted lawyers down by around 30%, the schemes spare the alumni from having an awkward gap on their CV, and give them valuable work experience and contacts.

But so long as graduates put on these schemes are lumped in with those who found genuine paid work at law firms, the schools will in effect be buying themselves precious U.S. News ranking spots for a few million dollars a year. And applicants to law school who are considering taking on a six-figure debt will get a misleading picture of the job market.

Seems like law schools have learned a thing or two from the U.S. government and the Federal Reserve about smoke and mirrors.

The scam economy rolls forward.

Full article here.

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GeNeRaL MaYHeM…

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GM Recalls Another 1.5 Million Cars; Halts Sales Until “Solution” Completed

General Motors is in trouble. On the heels of a 1.3 million car recall over fault ignition switches (that allegedly caused 12 deaths and could have been fixed with a $1 part), the bailed-out car maker has announced it will take a $300 million charge in Q1 to cover costs associated with this and 3 new recalls covering an additional 1.5 million cars. As Reuters reports, unsold vehicles will be placed on a stop-delivery until development of a solution has been completed. Why is this such a problem? Because GM's channel-stuffed dealer inventory is already at all-time record highs as the entire industry projected the sales to continue ad infinitum and inventory-to-sales surged to near-record highs.

Via WSJ,

General Motors Co. said it would take a $300 million first-quarter charge to cover costs associated with its faulty ignition switch recall and three new recalls announced Monday covering about 1.5 million different vehicles.

The auto maker recalled 1.18 million sport-utility vehicles with model years dating back as far as 2008 over seat air bag issues. The air bags may not deploy because of a wiring problem. Separately, the auto maker also is recalling 63,900 of a Cadillac model and 303,000 vans.

The announcement comes as GM begins the process of offering repairs to 1.3 million vehicle owners in the U.S. who are affected by a faulty ignition switch recall GM announced in February. The auto maker is in the midst of answering lawmakers and federal authorities over why it took GM nearly a decade to initiate that recall. The switches have been linked to 12 deaths.

…

On Friday, the Detroit automaker was hit with what appeared to be the first lawsuit related to the ignition-switch recall, as customers claimed their vehicles lost value because of the ignition switch problems. The proposed class action was filed in a Texas federal court.

And all this as inventories surge to record highs…

This was an increase from the 780,140 in January and is the largest ever channel stuffing print yet recorded by the post-bankruptcy GM in history.

Good luck liquidating all that pent up inventory without major incentives and margin crushing price reductions for the everyone in the distribution chain.

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