Undercapitalized Scotiabank’s new acquisition.

Scotiabank is picking up a 51% stake in Banco Colpatria. I think it is pretty awful how big banks have their businesses essentially underwritten by the central banks and governments of the world, and then they scoop up acquisitions like these. Oh well. Scotiabank still has horrendously bad TCE numbers (under 3.5%, only CIBC and National Bank of Canada are worse), and in a lot of ways they look as bad as Lehman Brothers.

Interestingly, Scotiabank’s CFO says the bank will have 7-7.5% Tier 1 Capital ratio by 2013, as reaching that target puts them in good financial health. But this is still way too low. Canada’s banks remain among the world’s least capitalized. Getting new over-valued acquisitions like Banco Colpatria is not the best idea in my estimation. They should be aggressively strengthening their balance sheets.


Nothing can save Europe.

There is no way that Europe can bail itself out. This guy makes the case with four facts:

FACT #1: Europe’s entire banking system is leveraged at 25 to 1.

This is nearly two times the US’s leverage levels. With this amount of leverage you only need a 4% drop in asset prices to wipe out ALL equity.These are literally borderline-Lehman levels of leverage (Lehman was 30 to 1).

Mind you, these leverage levels are based on asset values the banks claimare accurate. Real leverage levels are in fact likely much MUCH higher.


FACT #2: European Financial Corporations are collectively sitting on debt equal to 148% of TOTAL EU GDP.

Yes, financial firms’ debt levels in Europe exceed Europe’s ENTIRE GDP. These are just the financial firms. We’re not even bothering to mention non-financial corporate debt, household debt, sovereign debt, etc.

Also remember, collectively, the EU is the largest economy in the world (north of $16 trillion). So we’re talking about over $23 TRILLION in debt sitting on European financials’ balance sheets.

Oh, I almost forgot, this data point only includes “on balance sheet” debt. We’re totally ignoring off-balance sheet debt, derivatives, etc. So REAL financial corporate debt is much MUCH higher.


FACT #3: European banks need to roll over between 15% and 50% of their total debt by the end of 2012.

That’s correct, European banks will have to roll over HUGE quantities of their debt before the end of 2012. Mind you, we’re only talking aboutmaturing debt. We’re not even considering NEW debt or equity these banks will have to issue to raise capital.

Considering that even the “rock solid” German banks need to raise over $140 BILLION in new capital alone, we’re talking about a TON of debt issuance coming out of Europe’s banks in the next 14 months.

And this is happening in an environment prone to riots, bank runs, and failed bond auctions (Germany just had a failed bond auction yesterday).


FACT #4: In order to meet current unfunded liabilities (pensions, healthcare, etc) without defaulting or cutting benefits, the average EU nation would need to have OVER 400% of its current GDP sitting in a bank account collecting interest.

This last data point comes from Jagadeesh Gokhale, Senior Fellow at the Cato Institute, former consultant to the US Treasury, and former Senior Economic Advisor to the Federal Reserve Bank of Cleveland.

This is a guy who’s worked at a very high level on the inside studying sovereign finance, which makes this fact all the more disturbing. And he knew this as far back as January 2009!!!

Folks, the EFSF, the bailouts, China coming to the rescue… all of that stuff is 100% pointless in the grand scheme of things. Europe’s ENTIRE banking system (with few exceptions) is insolvent. Numerous entire European COUNTRIES are insolvent. Even the more “rock solid” countries such as Germany (who is supposed to save Europe apparently) have REAL Debt to GDP ratios of over 200% and STILL HAVEN’T RECAPITALIZED THEIR BANKS.

If Europe is to get out of this disaster, the answer is not bailouts. The mammoth debt must be liquidated. Big banks who made bad loans to profligate governments need to take their losses and go bankrupt. Anyone who is holding out, expecting some kind of economic voodoo miracle, needs to take their head out of the sand and recognize that solving the European debt crisis with bailouts is impossible.

— Read more at Phoenix Capital Research — 

The worst financial reporting of all time, courtesy CTV Calgary local news

Take a look at this. It’s hilariously stupid. It will only take a minute of your time (seriously, the video is that short).



So apparently the US dollar is a paper currency that is good because it is backed by the Federal Reserve. And the Federal Reserve backs the US dollar with… paper currency. I guess. I cannot follow the tortured logic here. I am embarrassed on this reporter’s behalf. The whole point of fiat currency is that it isn’t backed by anything and that you can just print it if you want!

Gold not being “backed” by anything is meaningless — after all, paper currencies used to be backed by gold!

When Greenspan says something like, “World currencies are down,” he is saying they are down against something. That something is gold.

Oh hell I don’t even need to criticize this further. It’s just so unbelievably dumb. It makes me laugh. It makes me cry. I think they snatched the reporter from a hair commercial or something, because she demonstrably knows nothing about money.

Oil down, stocks down, gold up!

The TSX got hammered pretty hard last week, and given how oil is trading right now I think we can expect another rough day when trading begins on Monday morning. The most amusing thing about the big sell-off on Thursday was how gold corrected by about 0.5% only and there were various “experts” on CNBC and Bloomberg talking how this was some kind of notable event and gold was set to reverse.

These people have been wrong on gold from the beginning. You should not listen to anyone like this, because they are not paying any attention. They seem to ignore that central banks are buying gold like crazy. South Korea’s central bank bought gold for the first time in 13 years.  Russia, Mexico, Thailand… their central banks want gold. Chinese and Indian people with their rising incomes want gold.

Here is a one-year chart on the gold price.



When it was $1000 an ounce, people said it was a bubble. In 2010, it just wasn’t the right time to buy gold (what the hell, Mr Ferguson?).  It’s a “barbarous relic,” they say (is Nouriel Roubini an idiot or what?), or “it doesn’t do anything,” say others (Buffet is an amazing investor who completely fails at economics). Even people who were generally favorable to the concept of investing in gold timidly said, “Well, it’s gone up so much, it’s too expensive right now, maybe I’ll buy it on the dips, neuhrg...” All of this was completely wrong. And it is still completely wrong.

When something rises so quickly, one would normally be wise to be skeptical. Yet gold’s price in the modern era does not represent a “normal” situation. Currency crisis is coming. Europe is basically going straight to the ninth circle of economic hell. The ECB has pledged to buy all the bad debt in Europe. QE3 through 13 is coming from the Fed. You can count on it.

This is all positive for gold. What is bad for gold’s price? Deflation — but we don’t face deflation, at least not until the final phase of the crisis, when the Federal Reserve and other central banks finally say, “No.” We still have a ways to go, I promise. This is Bernanke and like folk we’re talking about, after all.

Instead, what we face now is systematic, global currency depreciation. That will ensure gold will continue to rise for a long time to come. Buy yours now — start with a single coin or two. Work your way up to $10,000 in coins by the end of 2011. I strongly anticipate gold to reach $2000 by year’s end, and even then it will have a lot of assured upside.

Bernanke’s “stealth bailout” of RBC and other foreign banks.

To follow up on our earlier post about QE2 simply padding the excess reserves of precariously bankrupt financial institutions, I want to call attention to ZeroHedge’s excellent reporting about  QE2 amounting to nothing more than a foreign bank rescue operation.

ZeroHedge rightly identifies European banks on the NY Fed’s list of primary dealers as being main beneficiaries of QE2. Although it is interesting to draw attention to the lone Canadian bank, RBC, in this list, far more interesting are the implications of this “stealth bailout” (which provide ample support to my contention that there will definitely be QE3):

… here is Stone McCarthy’s explanation of what massive reserve sequestering by foreign banks means: “Foreign banks operating in the US often lend reserves to home offices or other banks operating outside the US. These loans do not change the volume of excess reserves in the system, but do support the funding of dollar denominated assets outside the US….Foreign banks operating in the US do not present a large source of C&I, Consumer, or Real Estate Loans. These banks represent about 16% of commercial bank assets, but only about 9% of bank credit. Thus, the concern that excess reserves will quickly fuel lending activities and money growth is probably diminished by the skewing of excess reserve balances towards foreign banks.

More points of interest:

Furthermore the data above proves beyond a reasonable doubt why there has been no excess lending by US banks to US borrowers: none of the cash ever even made it to US banks! This also resolves the mystery of the broken money multiplier and why the velocity of money has imploded.

Instead of repricing the EUR to a fair value, somewhere around parity with the USD, this stealthy fund flow from the US to Europe to the tune of $600 billion has likely resulted in an artificial boost in the european currency to the tune of 2000-3000 pips, keeping it far from its fair value of about 1.1 EURUSD.

But implication #4 is by far the most important. Recall that Bill Gross has long been asking where the cash to purchase bonds come the end of QE 2 would come from. Well, the punditry, in its parroting groupthink stupidity (validated by precisely zero actual research), immediately set forth the thesis that there is no problem: after all banks would simply reverse the process of reserve expansion and use the $750 billion in Cash that will be accumulated by the end of QE 2 on June 30 to purchase US Treasurys.


The above data destroys this thesis completely: since the bulk of the reserve induced bank cash has long since departed US shores and is now being used to ratably fill European bank balance sheet voids, and since US banks have benefited precisely not at all from any of the reserves generated by QE 2, there is exactly zero dry powder for the US Primary Dealers to purchase Treasurys starting July 1.

This observation may well be the missing link that justifies the Gross argument, as it puts to rest any speculation that there is any buyer remaining for Treasurys. Alas: the digital cash generated by the Fed’s computers has long since been spent… a few thousand miles east of the US.

Which leads us to implication #5. QE 3 is a certainty. The one thing people focus on during every episode of monetary easing is the change in Fed assets, which courtesy of LSAP means a jump in Treasurys, MBS, Agency paper, or (for the tin foil brigade) ES: the truth is all these are a distraction. The one thing people always forget is the change in Fed liabilities, all of them: currency in circulation, which has barely budged in the past 3 years, and far more importantly- excess reserves, which as this article demonstrates, is the electronic “cash” that goes to needy banks the world over in order to fund this need or that. In fact, it is the need to expand the Fed’s liabilities that is and has always been a driver of monetary stimulus, not the need to boost Fed assets. The latter is, counterintuitively, merely a mathematical aftereffect of matching an asset-for-liability expansion. This means that as banks are about to face yet another risk flaring episode in the next several months, the Fed will need to release another $500-$1000 billion in excess reserves. As to what asset will be used to match this balance sheet expansion, why take your picK; the Fed could buy MBS, Muni bonds, Treasurys, or go Japanese, and purchase ETFs, REITs, or just go ahead and outright buy up every underwater mortgage in the US. This side of the ledger is largely irrelevant, and will serve only two functions: to send the S&P surging, and to send the precious metal complex surging2 as it becomes clear that the dollar is now entirely worthless.

Smoke and mirrors on interest rates at the Bank of Canada

For their sixth meeting in a row now, the Bank of Canada has decided to leave interest rates unchanged.

Some of suggested this latest press release suggests  higher rates ahead, and the stronger dollar that comes with it. I think this is flawed and superficial analysis.

Let’s consider the press release with the awareness that all central bankers are Keynsian-merchantilists.

The possibility of greater momentum in household borrowing and spending in Canada represents an upside risk to inflation. On the other hand, the persistent strength of the Canadian dollar could create even greater headwinds for the Canadian economy, putting additional downward pressure on inflation through weaker-than-expected net exports and larger declines in import prices.

So what would curb household borrowing and spending in Canada? Higher interest rates of course. But then that would create a stronger Canadian dollar, which the BoC regards as hazardous because it would hurt exports. To me, this does not suggest higher interest rates from the BoC anytime soon.

Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1 per cent. To the extent that the expansion continues and the current material excess supply in the economy is gradually absorbed, some of the considerable monetary policy stimulus currently in place will be eventually withdrawn, consistent with achieving the 2 per cent inflation target. Such reduction would need to be carefully considered.

Now this sounds like they are leaning towards raising interest rates. Or does it? Earlier in the press release, they say the following:

While underlying inflation is relatively subdued, the Bank expects that high energy prices and changes in provincial indirect taxes will keep total CPI inflation above 3 per cent in the short term. Total CPI inflation is expected to converge with core inflation at 2 per cent by the middle of 2012 as excess supply in the economy is gradually absorbed, labour compensation growth stays modest, productivity recovers and inflation expectations remain well-anchored.

Here is where we get to the “smoke and mirrors.”

They were just quoted saying they would want to withdraw the monetary stimulus to aim for the 2% inflation target.

But in this last quoted paragraph, they just said that they expected inflation to hit 2% without raising interesting rates. So … what the heck is this all about? Basically, there is no chance interest rates will be going up any time soon.

The reality is this — Carney will not allow the Canadian dollar to appreciate too significantly relative to currency of this country’s primary consumer, which is America.

One must remember that central bankers behind major currencies work together — the key idea is to have major currencies devalue at roughly a steady rate vis-a-vis each other. It is not a counter-example to refer to hyperinflation in Zimbabwe or a like event, because that is a tiny country that means little to the world economy in the grand scheme of things.  The Canadian dollar will not strengthen dramatically against the US dollar, or any other major currency.

Why not? If you are a central banker, you have two conflicting goals:

For importers, you want a strong dollar, so that you can buy foreign goods more cheaply.

If you are an exporter, you favor a weak dollar, so that you can sell more goods to foreigners.

Exporters have traditionally been a more focused and successful interest group than the mass of faceless importers — the exporters are visible and politically active, but the importers are literally… everyone else. Their influence is spread out like too little peanut butter spread over too much bread. Therefore the tendency is always for a steady level of currency depreciation. For the BoC, that is a 2% inflation target.

Because of these conflicting agendas, the central bank behind a major currency cannot allow that currency to appreciate or depreciate too significantly relative to any other major currency. It is the classic problem with central planning — how do you decide what the magic number is? The level of depreciation must be just enough to keep everyone happy — or at least minimize their relative unhappiness.

To take out price distortions, one can consider how all currencies are down significantly from where they were one year ago, in terms of gold. The Canadian dollar is down 12%. So while it has lost purchasing power in terms of gold, it has gained purchasing power relative to the USD, which is down 20% in the last year. The euro and the yen have fared relatively better than the Canadian dollar (down 8% and 11% respectively, in terms of gold), and the American dollar has fared relatively worse. The important point is that they are all down in terms of gold.

This is to be expected. Although the CDN may rise or fall a bit relative to one major currency or another, depreciation of the Canadian dollar will continue relative to gold until Economic Judgment Day comes and Great Depression II hits us. Economic Judgment Day until the big American banks start to lend, and the Federal Reserve is forced to hike interest rates. Until then, Canadian currency is just another depreciating currency in a world of depreciating currencies.

Austrian economics in Mainstream Canadian Newspaper…!

I thought it was crazy enough to see the Canadian War Street Journal National Post to have a columnist calling out the Bank of Canada for its counterfeiting operations. The influence of Austrian economics hangs over this article like a halo.

Now shades of the Austrian School are back at National Post.

Peter Foster comes out citing Austrianism on the topic of monetary growth and inflation leading to malinvestment. Hayek’s name is dropped. Contra Keynesianism, which he calls a systemic failure, producing only debt and inflation and no real economic solutions. This is not too exciting by itself — this Peter Foster guy is nothing special as a commentator, other than his general favor of markets over governments. But the fact that it gets reference in a publication like this is interesting however.

I discovered Austrian economics in 1998, sort of by accident. You would have never, I mean NEVER seen a reference to Austrian economics in a mainstream paper back then. Austrianism was just … a complete non-issue. Fortunately, Austrian economics has become more mainstream, due in large part to the Mises Institute and Ron Paul’s 2008 presidential campaign in America, and outspoken fellow travelers of the Austrian school on the financial news networks, such as Peter Schiff and Marc Faber.

The more people discover the Austrian school of economics, the more people will become impervious to the dogmas and deceptions that have made them blind to how the market makes them free and the government enslaves and impoverishes them.

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