Ignorant Depositors

The plan for today was to pen an article regarding silver.  I believe silver to be the cheapest, most undervalued asset on the planet.  From these current levels I believe any capital in silver is a no brainer.  Let’s hold off on this thought until next week however, a more pressing thought has come up.

Let’s start with a question.  Would you ever lend money to someone you knew for a fact was bankrupt?  Or, would you lend money to someone who told you to your face they were cooking their own book?  Isn’t this exactly what you are doing any time you deposit money into most any bank?  Without getting long winded on this aspect, you do remember back in 2010 or thereabouts our banks in the U.S. were allowed to outright cook their books?  The banks were no longer required to price their portfolios at “marked to market” prices.  Since then, they can simply “make up” whatever prices they choose and report those.

It is the same situation in Europe but they have had a little “help” in their fraud.  For example let’s look at Greek bonds that are held in banks all over Europe.  Greece without a doubt cannot mathematically pay back their debt.  They do not have enough cash to even make next month’s “credit card payment” without an infusion from somewhere.  I use this term credit card payment because that is exactly what these are, this week for example is a miniscule 500 million euros, not even half a ham sandwich in the global scheme of things.  If they cannot make a payment or they go through a restructuring, or in all probability they cut a deal with the Russians and Chinese followed by “we quit and we aren’t paying you” …what are these bonds really worth?  Ten cents?  Five?  Zero?

My point is this, these bonds are carried on balance sheets at 100 cents on the euro!  Banks, including the European Central Bank itself values these bonds at par as if they were pristine a credit.  The BIS has allowed sovereign credits within Europe to be carried at par on bank balance sheets.  This is clearly bogus.  It was my intention to also speak about Spain’s short term interest rates just went negative.  They were my original thought to “would you lend money to a bankrupt entity?”.  While writing this, two pieces of news have come out and spotlights my point.  Greece has in fact made the April payment, now we wait for the next due date which finance minister Varoufakis says “will be different”, what does he mean by “different”?  Mr. Tsipras concluded his meeting in Moscow, what exactly was discussed?  Greece has also surprised us yesterday by contemplating calling all new debt taken on since 2012 as “odious” .  I believe the new amount of debt taken on is over 100 billion euros, does this mean they will just walk away from this post 2012 debt and only service the earlier debt?  Was this a part of the discussions in Moscow?  Greece will continue to pay on pre 2012 debt but not post debt?  Is this debt “justified” being priced at 100% or par or should a minor adjustment be in order?

As you know from previous writings, the Austrian banking system is wobbling because of the rise in the Swiss franc versus the euro.  This was caused by Hypo Alpe Adria bank not being able to make a 600 million euro payment.  This has affected their counter parties and has since spread.  Could this paltry amount take down the Austrian banks?

Do you see what today’s exercise is all about?  It looks like amounts as small as “millions” which only amount to credit card monthly payments may be enough to torpedo individual banks …and even a country!  The fact that the world is so levered and interconnected means  very small “non payments” have the ability to spread and take everything down with it… and it looks like this is exactly what is happening!

I have said all along that our entire financial system was about “collateral” and it would be the realization the collateral was “bad” as the reason for collapse.  This is where we are today, extremely small interest payments which cannot be made are about to expose the true value of the underlying “collateral”.  Just because the regulators have allowed banks to mark their assets to fantasy levels does not mean the bad collateral will not fail.  It will.  IT ALL WILL!  This is the reason “bail in” legislation has been written and put into place all over the world.  Because they KNEW when they wrote the legislation they would be forced to use it.

The white knight of “bail outs” will not and can no longer ride in to save ignorant depositors.  I use the word “ignorant” because who in their right mind would lend their money at a negative interest rate …in a debasing currency …to a bank that lies about their asset quality …in a system where if one fails they all fail?  And on top of this, the regulators, central banks and governments themselves have already written legislation saying “when it comes down, we will take your money to make ourselves whole”.  Who would do this?  I’m pretty sure holding gold is a safer bet but that’s just me and everyone knows I wear a tin foil cowboy hat.

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Courtesy of www.milesfranklin.com