U.S. Dollar Sendoff Stock Market Rally: Dow up 56% from Bottom in U.S. Dollars but up only 31% in Euros. How a Crashing Currency Hides Actual Trends. Over 40 Ounces of Gold Needed to Purchase Dow Index in 2000. Today 9.4 Ounces of Gold will buy the Dow Index. Oil is up 128% from March low.
Many Americans have a hard time wrapping their mind around a declining currency or the hidden tax that is inflation. The U.S. Treasury and Federal Reserve understands this and for decades has exploited this issue to slowly siphon off the buying power of the U.S. dollar. Openly they tell the public that they are for a strong dollar policy but every action they take is guided to slowly debasing the currency. Take for example the current stock market rally. The Dow Jones Industrial Average is up 56 percent from the March lows. A stunning rally only seen one other time in history and we would need to go back to the 1930s for that. Yet at the same time, we have seen a collapse in the U.S. dollar. That is why oil, even though demand is relatively the same, is now back near $80 a barrel.
The Federal Reserve can easily strengthen the U.S. dollar. All they would need to do is increase interest rates to reign in liquidity. Yet this would crush the debt consumption in housing and autos. To show you the insidious way how the value of the currency is being washed away, take a look at the recent Dow rally in terms of Euros, a more stable currency:
In U.S. dollar terms, the Dow is up 56 percent but when measured in Euros the rally only comes out to be 31 percent. A strong rally no doubt but nothing close to the 56 percent. We can also measure the Dow in relation to gold that can be used as another vehicle for storing wealth:
When we place the Dow in gold terms, there is no rally. Just a slow decline. Take this for example. In 2000 gold hit a low of roughly $260 per ounce. The Dow in January stood slightly higher than it does today at 10,900. So if we take this as a measure:
10,900 (Dow January 2000) / $260 per ounce 2000 = 41.9 ounces needed to buy index value
Today the number is very different even though the Dow is virtually the same:
10,092 (Dow October 2009) / $1,063 per ounce 2009 = 9.4 ounces needed to buy index value
That is why there is a danger in believing the current stock rally is actually as positive as the raw number may indicate. It is not. The U.S. dollar since 2000 has fallen by approximately 38 percent. The Fed and U.S. Treasury have been slowly robbing the buying power of each American dollar for nearly 3 decades. That is why even though the median income has not moved for nearly a decade, buying power has collapsed. These are methods of making Americans poorer in more hidden ways that politically work in favor of the banking elite.
Source: Market Oracle
The median household income for the average American is approximately $50,000. Just imagine if the U.S. Treasury and Fed didn’t have these mechanism in place. Do you think Americans would be furious that their median income would now be $31,250 after a decade? Of course. Yet most look at their income and see it moving sideways yet they are really earning less because they are being paid in a weaker currency.
Just think of everything that has gone up in value over the past decade:
-Housing
-Autos
-Clothing
-Healthcare
-Food
-Energy
-Education
The list goes on and on. Yet pay has stayed in place. Some of these sectors are correcting like housing. Yet even after the housing crash, in many areas homes are still too expensive given local area incomes. The Dow has rallied but what has really fueled the rally is the boom in the financial sector from the March lows:
Source: Sudden Debt
While the S&P 500 is now up a stunning 62 percent from the bottom, the KBW bank share index (black line) is up over 160 percent. The reason for this is the government has largely subsidized the banking sector on the backs of the American public. Nearly 27 million are unemployed or underemployed yet we have spent trillions for what? The above rallies will tell you for what.
The bailouts come at a cost. A low Fed rate hurts the dollar. Which in turn hurts the American consumer since we are not designed as an export economy. This can change but it will take years. Our economy is designed to consume and we have done too much of this. Oil is now back up reflecting our weaker dollar:
Oil is now up 128% from the lows reached in March. Is this because there is a surge in demand? Not really:
Source: Calculated Risk
This has more to do with the decline in the U.S. dollar. This in turn means Americans are going to spend more money on energy with their weaker dollars. Don’t be fooled that a declining dollar is somehow good for the economy. It helps in certain areas but isn’t a panacea like some policy makers would like to believe.
Currently we are facing dis-inflation from a decade long glut. But once things stabilize, we can expect that our U.S. dollars are going to buy a lot less than we once thought. The above charts point to a slowly declining standard of living if we don’t change our policies and our way of life. Spending beyond our means does have long-term repercussions.
JP Morgan the new Lehman Brothers: Why Make Money through Commercial Banking when you can become a taxpayer backed Investment Bank. How JP Morgan Really made the $3.6 Billion in Q3 Profits.
Toxic mortgages and credit card losses through defaults are rising at a rapid pace. This was also apparent in the earnings report from JP Morgan that reported positive earnings because of non-retail banking activities. Yet the media for whatever reason isn’t highlighting more carefully where the gains are coming from. For example, JP Morgan which swallowed up Washington Mutual and Bear Stearns, posted losses on credit cards and home mortgages yet doubled its earnings from last year in its investment banking division. Here is one of the key examples of why removing Glass-Steagall is such a major problem. The recent meteoric rise in stock prices merely reflects hot money trying to find ground. If we look at actual loan losses they are still on the rise:
Source: New York Times
And banks are not lending more as they stated initially with the request for bailout funds. The premise was that trillions were needed or lending would completely dry up. Lending has dried up. Take the mortgage market for example. Loans that are FHA insured now make up the bulk of the market. For non-FHA loans, banks seek to have loans backed by Fannie Mae, Freddie Mac, or Ginnie Mae. In other words, banks are unwilling to lend their own money and will only lend funds backed by the government (aka the American taxpayer).
This behavior is most pronounced with credit cards. With rising defaults companies are using bailout funds to plug up additional losses. Yet they are also combining the easy money to play their hand on Wall Street. The mix of retail and commercial banking is still occurring even after our economy nearly tanked and we are still in recession nearly 2 years later.
I had an experience with the credit card companies recently that shows what is occurring. One of my cards had a line of $10,000 but I rarely use it. If I did use it, I would pay it off every month. Credit card companies look at people that pay off their balance every month as deadbeats. So last month, I receive a letter stating my balance was lowered to $3,000 simply because my lack of use. Keep in mind that this line had been open for 7 years. So I call up the bank and they tell me I can either stay with the new terms or close my account. This is how banks are playing the system and stealing money from taxpayers.
Don’t be fooled, they are pulling credit back:
Banks are still pulling credit cards out of the system on top of the 8 million that were pulled in the first quarter of 2009. Let us look at how JP Morgan turned a $3.6 billion profit in the third quarter more carefully.
“New York, October 14, 2009 - JPMorgan Chase & Co. (NYSE: JPM) today reported third-quarter 2009 net income of $3.6 billion, compared with net income of $527 million in the third quarter of 2008. Earnings per share were $0.82, compared with $0.09 in the prior year.
Jamie Dimon, Chairman and Chief Executive Officer, commented: “Our net income of $3.6 billion in the quarter reflected the strong earnings power of the company, with broad-based growth across the Investment Bank, Asset Management, Commercial Banking and Retail Banking. However, credit costs remain high and are expected to stay elevated for the foreseeable future in the Consumer Lending and Card Services loan portfolios. Accordingly, we have added $2.0 billion to our consumer credit reserves, bringing the firmwide total to $31.5 billion, or 5.3%1 of total loans. Tier 1 Common Capital, another key element of our fortress balance sheet, was also strengthened through capital generation during the quarter, to $101 billion, or 8.2%.”
In other words, JP Morgan made a bulk of its profits in sectors that pre-1999 (Glass-Steagall) would not have been allowed for commercial banks. They are operating as a gigantic hybrid of old school banking with casino style investment banking on Wall Street. Keep in mind JP Morgan is one of the too big to fail darlings. Instead of opening consumer credit, they are pulling back on it to the tune of $2 billion in reserves for future losses.
The below comes from their 8-K filing. How much of that $3.6 billion came from their i-bank division? Over 50 percent of it:
A large chunk of it came from the investment banking division. I don’t think the American public had in mind when they handed trillions to the banks that they would be using the money to gamble on Wall Street. Surely they are doing something through their retail side?
Nope. In fact, this is where they are adding loss provisions to the continued deterioration of the Washington Mutual loans. Average total deposits decreased over the quarter by 2 percent. Branch sale of credit cards were down 18 percent. As you would imagine, they are losing money through their credit card division:
So much for the average American. But where else did the big money come in for the $3.6 billion in profits if it wasn’t through the average Joe and Mary on the street? Corporate and private equity:
And there it is. You might as well label JP Morgan the new Lehman Brothers because they are operating like an investment bank. So much for those bailouts helping the average American. The media really needs to scrutinize how these companies make their earnings. They are simply using hot and easy money to double down in the Wall Street casino on the taxpayer dime. No reform has happened since the collapse of Wall Street because these banks own our politicians.
