The Economy Guy

Stock market down 36 points, and no change in the bond market.  How boring.

The Dollar, oil and gasoline went sideways too.  How boring.

Gold fell $9, and is now a great buy again.

In the news today….

The IMF said today that the amount of write offs from our lousy securities situation will be $1T (Yes, that is trillion, like $1000B).  So far the banks have written off $200B with $80B project to go.
The rest of the Trillion will be coming from Hedge Funds and Pension Funds.

Hedge funds are very dangerous because they’re here today, and gone tomorrow.  They can shake, rattle and roll our markets.  Pensions, on the other hand, are more malignant.  They would simple wipe out that retirement fund you thought you had.

While most people don’t have much control over their pension funds, IF YOU DO, you should be looking very hard at the exact investments that your pension fund is investing in.  If they are these junk securities, MOVE quickly to something more safe.

Our banking system – in more detail….

For those of who listened to the “Great Depression” tele-conference that we held, you will remember that one of the fundamental things that banks use to control the amount of loans they made is their Reserve Ratio.  Simply put, this is the percentage of money they keep in their bank to be able to pay out to customers who want to withdraw some money.  This percentage is usually around 10% – 15%.

Today, in our more “sophisticated” society, banks measure their capital margin.  This is the amount of money that the bank is worth.  They also measure the risk of the securities they hold.  Some securities are so risky, they must be accounted as 100% risk.  Some securities, like US Treasury Bonds, are not so risky, so only 20% of their value is considered at risk.  When you add up the “risk adjusted” value of all securities held, and divide it into the bank’s capital margin; the resulting ratio better be more than 10% according to FED regulations.  Banks pride themselves for having ratios well above 10%.  When the ratio approaches 10%, the bank is considered in trouble, and the FDIC starts kicking down the door to see what the problem is.  When the bank’s ratio falls below 10%, they are forcably merged with another bank, and the FDIC effectively takes over the bank until that merger takes place.

Why the big story???  Well, Citibank and Wells Fargo Bank are approaching 10%.  Their ratios are both 10.7% right now.  They will both probably be curtailing lending to help bolster their ratio as outstanding loans get repaid.  Also, just in case you were wondering, the average ratio for all US banks is 12.8% today.

I’ve warned about doing business with Citibank before.  However, I was unaware that Wells Fargo was also dipping into trouble.   If you have big holdings in either of these banks, you should review those holdings.  In NO CASE should you ever have more than $100,000 in any single account as this is the FDIC insurance limit.  In fact, I would state that your TOTAL holdings should not be greater than $100,000 in either of these banks.  Caveat Emptor.

Tonight’s Dinner Conversation…..

The SEC filed a complaint against 5 former San Diego city officials who “knowingly” under-funded the city’s pension fund.  Their greatest crime was NOT telling the bond rating companies or investors.  This is a very serious crime as far as the SEC is concerned.

So, for tonight’s dinner conversation – ask your partner if he/she thinks that the SEC should be filing a complaint against all members of Congress for knowingly under-funding the Social Security Pension Fund?????  Have fun.

Here are today’s numbers:
Dow Jones 30 Industrial – 12,576 (Down 36 points)
10 Year Treasury Bond – 3.56% (No Change)
Euro – $1.5709
Gold – $918 (Down $9)
Oil – $108.50 (Down $0.59)
Gasoline – $2.75 (Down $0.03)