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Not Your Cuppa Tea?

By Jon Nadler       Printer Friendly Version Bookmark and Share
Apr 23 2009 9:08AM

"Due to travel schedule there will be no morning commentary today."

Good Morning,

New York spot bullion prices opened on a continuing steady note, still supported by pre-festival Indian buying and by financial sector uncertainties. As a safe-haven and potential anti-inflation wealth vessel, the yellow metal continued to remain attractive to more people, and at a higher percentage allocation than historically. As a value play however, the jury remains very much out on bullion. Harvard's Martin Feldstein reiterated deflation fears this morning, and expressed little if any concern about inflation (now, or later). That leaves us with safe-haven. And the spec funds.

Current risk/reward possibilities extend only about $50 on either side of the $900 marker. Spot gold opened with a $1.80 gain at $892.50, silver gained 8 cents to start at $12.40, and platinum rose $8 to $1177 per ounce. Palladium was off $1 at $230 this morning. Barring surprise news from unknown quarters, the metals will mark time ahead of Friday's BST (Bank Stress Test) Part I developments. Silver received a nice boost (if only psychological) this morning, from GMFS findings that despite very poor industrial offtake, the metal will remain in double-digit territory for longer than would otherwise be the case - as it is receiving support from investors (individual and ETF-flavored).

Metals prices made steady progress to the upside overnight, albeit their gains were still rather muted overall. The US dollar stalled at 86 on the index, oil continued just under $50 per barrel, and equity markets continued to drift after the mid-week "Geithner" pop. Jobless claims this week matched estimates, but were (unfortunately) higher than the 'critical' 600,000/week number that is being regarded as significant.

May could still show a possible 700,000 jobless number, but the consensus is gelling towards applying the label of "The Beginning of the End" on the economic slump. Even if unemployment rises to 10% before year-end. Recovery? Well, no one is willing to talk about green shoots turning into cherry blossoms until the next such blooming season rolls around in 2010. Want another nice little metric? Home prices in the Hamptons plunged 23% in the wake of Wall Street's pink slip bonanza. Pity the poolmen and the gardeners. And the nearby Aston-Martin dealers.

Studies indicate that IF the March 27 jobless data (at 674,000 was indeed the peak figure, then the recession may have ended some eight weeks earlier. Not for everyone, however. US automakers are still steering a course towards a cul-de-sac containing a brick wall at the bottom. FIAT's half a billion-plus loss on Q1 raises questions about its willingness to inject and cash into moribund Chrysler. It could be 'Arrivederci!' time or "Divorce Italian Style" before such a marriage is ever consummated.

Government Motors is shaping up as a near-certainty from GM. Ford, on the other hand, while still showing a 30% chance of going wheels-up, is showing a 60% chance of making it. Reports indicate that some consumers are trading in their GM (and even Japanese) sets of wheels for FoMoCo product. Perhaps in anticipation of a no-secondary-market developing for GMs soon-to-be-defunct former brands.

US bank stress tests will triage banks into three 'buckets' and we will learn tomorrow who made which category. Bear in mind that landing in the third bucket is based on scenarios that involve US unemployment levels as high as 10.2 to 14%, etc. May 4th is the date when the conclusions of all of this will be drawn. Also bear in mind the assessment of Mr. G earlier this week, that the majority of the institutions have more capital than needed.

The entire testing is based on a 'two more years of pain' what-if, rather than current conditions. It is well-known that of the more than 8,000 banks in the US only a small (very small) handful are facing any serious difficulties. And, while bank executives meet to discuss these capitalization metrics, President Obama is grilling some of their co-workers on another really thorny issue: credit cards. There is no way to put a spin on the pressure being applied to plastic pushers at this juncture. It can only be compared to waterboarding. Expect some of them to squeal, but eventually give in. Rates on cards will have to change.

Something else that will also have to change is the dire tone of doomsayers. When one applies real-world metrics to the current rescue programs, surprisingly little emerges that should have one keeping Sominex on the nightstand. The Wall Street Journal and David Widener put some of the numbers to their own 'stress' test and found that we might not need to be as stressed as we currently are:

"Anyone who takes tea with friends will tell you: The parties are painless. It's the gossip that hurts. In the same way, today's anti-tax, anti-spending movements aren't the problem, it's the dangerous misconceptions they spread about the government response to the financial crisis.

Their argument -- that huge tax hikes are coming or have been implemented to pay off bailouts for banking fat cats -- betrays a lack of understanding of the government's approach to solving the financial crisis. When protesters or critics complain about the $10 trillion-plus spent on the Wall Street bailout, you can understand how their estimates of the number of protesters in the streets last week were slightly, well, inflated.

The truth: No one's paying new taxes directly related to the bailout. And most of the government rescue packages offered to the banks have gone untapped or are being repaid. It doesn't take a lot of checking to confirm this. ProPublica, the investigative journalism site, thoroughly tracks the multiple government programs and has filled in the blanks for many programs that are less than transparent. (Or, if you're on the go and want your bailouts simply illustrated, there's a cool little iPhone application called BailoutWatch that monitors more than two dozen government programs, such as the $245 billion Citigroup Inc. loan-loss provision and the $80 billion Credit Union Deposit Insurance Guarantee program.)

a tax day tea party rally

Associated Press

Protesters carrying signs and American flags participate in a tax day tea party rally at the Illinois State Capitol in Springfield, Ill., April 15, 2009.

Make no mistake, U.S. taxpayers are on the hook for a lot of money. The government has spent or expects to spend about $2.4 trillion in the next few months to keep the financial gears moving. It's a stunning amount of money made worse by rage-inducing missteps such as the bonus debacle at American International Group Inc. and the initial lack of direction for the Troubled Asset Relief Program.

We'll shake our head about those mistakes someday, provided the government plan works as hoped.

But the misinformation surrounding Washington's aid to Wall Street is obscuring exactly how the bailout funds are being used, and it's pressured lawmakers to focus on constituent complaints instead of working on solutions. If the economy does recover within a year, we'll have spent a lot to rescue the financial system, but nowhere close to the 14-digit figure flogged by tea party protesters.

In fact, there's no way the government will spend that much, because many of the 26 bailout programs aren't being used much, according to Federal Reserve and Treasury Department statistics. For instance:

  • Banks have tapped the FDIC's Temporary Liquidity Guarantee Program for $297 billion so far. That's about 20% of the total $1.5 trillion allocated. This is the biggest of the government programs, and banks pay 0.5% to 1% interest for the right to borrow the money depending on how long they keep it.

  • During its first month, the Term Asset-Backed Securities Loan Facility, or TALF, has only financed $4.7 billion in consumer debt, far below the $1 trillion allocated. In addition, participation is declining with each new funding cycle.

  • The Money Market Guarantee Program, aimed at insuring money-market funds against losses, hasn't spent a dime. It covers up to $3.8 trillion in money-market debt. This program is actually making a small profit, because participating funds are required to pay a fee.

  • Other than the stimulus bill, the program with the biggest outlay so far is the Troubled Asset Relief Program, or TARP. More than $570 billion has been committed, but less than $400 billion has actually left the Treasury Department. Like most of these programs, it's unclear how much of this money will be repaid, but most banks say they're either ready or capable of giving it back. If not, they have to pay a 5% annual dividend to the government. In just the first three months of this year, the government has collected $2.52 billion in TARP interest.

You get the idea. Most of these programs were designed as backstops and as proof that the government stands behind the country's private financial system. The government is extending its own credit line to banks until the private sector can repair its own. Recovery, when and if it occurs, will render many of these programs obsolete. The actual cost to taxpayers will be either negligible or drastically less than the most dire forecasts suggest.

Of course, taxpayers stand to lose more if the economy worsens and the financial system losses deepen further. It's not hard to imagine a scenario in which high unemployment leads to bigger loan defaults, setting off a domino effect of lower home prices and bank failures. Americans have $2 trillion in credit-card debt, and banks are holding that, too.

If that scenario comes to pass, financial companies could tap every dollar of the government's massive credit line. The International Monetary Fund on Monday projected banks world-wide will need an additional $875 billion in capital by next year to get reserves to pre-crisis levels. That means most banks will need to raise cash through the public and private markets -- or, failing that, from the government.

But potential losses aren't the same as real ones. Our national debt already stands at $11 trillion. Most of that debt was run up in the last eight years, when government spending outpaced declining tax revenues. The Iraq war is close to costing the nation $1 trillion. Hurricane Katrina cost us about $110 billion.

We ran up a huge tab for our kids well before the bailout, but it's unlikely that such an inconvenient fact will be the talk of the next tea party."

Until later,

Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal



Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.