Banks Are Suffering From Their Own Stupidity, by The Mogambo Guru

The first half of the year is over, and now all those brokerage accounts and retirement accounts will be sending out statements to hapless account holders, and it is bad news in spades. This is why (I assume) the Plunge Protection Team (composed of the Federal Reserve, the Treasury and bank insiders) tried to drive the stock markets up on Monday, June 30 – to make those account statements look not quite as bad, and, hopefully, prevent people from dumping all of their stock and bond holdings in a desperate attempt to save something before the whole idiotic, fiat-currency, unlimited-fractional-banking thing just collapses.

Perhaps this drop in the market averages (as demand overwhelms supply) is what prompted John Williams at to write, “Overhanging the markets for a number of years has been the question as to when the major holders of excess U.S. dollars in the global financial system might look to dump those holdings. An opportunity for that dumping is at hand.”

The reason is that “Most central banks know that their unwanted dollar hoards are going to generate long-term losses, but the oil markets have opened up an opportunity to mitigate some of those losses. For the rest of the world, dollar dumping now would reduce inflation risks outside the United States.”

This means that “Over the longer term, U.S. equities, bonds and the greenback should suffer terribly, while gold and silver prices should boom.”
And it is not just him and me that are so gloomy, but a new study from the Bank for International Settlements (BIS) noted that a plunge in the dollar “may happen”, as the dollar has slid 14% against the euro (EUR) in the past year, handing foreign investors in U.S. dollar assets “big losses measured in dollars, and still bigger ones measured in their own currency”, and which is making people so nervous that “a sudden rush for the exits cannot be ruled out completely.”

Bob Janjuah, analyst at the Royal Bank of Scotland, has also advised clients that “A very nasty period is soon to be upon us – be prepared,” which goes along with that bank’s warning that inflation has paralyzed the world’s central banks, and that of a full-fledged crash in global stock and credit markets over the next three months looks more and more likely.

And the stupid banks (always the cause of all of economic troubles) are suffering from their own stupidity, and Bill Buckler of newsletter notes that “US Banks have suffered $US 391 billion of losses and write-downs from mortgage- related securities since the start of 2007, according to the data compiled by Bloomberg. US banks could lose another $US 300 billion on real estate loans during the year ahead.”

What makes this $691 billion loss so special is that “such losses could jeopardize balance sheets because the US banking system had only $US 1,350 billion of equity capital”. Hahaha! They’ve lost two-thirds of the banks capital! Hahaha! Morons!

Since all things are connected to all things, he says, “the sum of it all is that the entire US banking and financial system is so threadbare, fragile and short of capital that a collapse or crash in one place could knock the underpinnings out from under several other US financial sectors which would take even more down with them. A systemic crash – at any time – is today a distinct possibility.”

This is all in addition to the fact that morons who have kept investing in the American stock market are suffering losses, proving once again that the majority of investors must lose money over the long term. Spengler at notes that when he says, “American equity markets show no real capital gains since 1997. That is, an American who bought the equivalent of the Standard and Poor’s 500 Index at $954 in January 1997 and sold today at $1,278 would have exactly the same number of inflation-adjusted dollars.”
Mr. Spengler concludes, “My advice to individual investors? Invest in some popcorn, because the next six months will be something to watch.”

Jim Sinclair of is more humorously laconic when he says, “You can be sure something really stupid is about to happen.” He might have been referring to me, but I am usually stupid to start with, and so why would he just be mentioning it now? So, I think he means something more sinister. Much more sinister. And ugly. – July 7, 2008

Editor’s Note: Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter – “an avocational exercise to heap disrespect on those who desperately deserve it.” The Mogambo Guru is quoted frequently in Barron’s, The Daily Reckoning and other fine publications. Click here to visit the Mogambo archive page.