Gloom Abounds, Faber’s Forecast, Crisis at the FDIC and More!

• Home sales, consumer confidence, jobs… gloom abounds
• Yet stocks, and Knuckman, are resilient… discover the “crude correlation”
• Faber’s forecast: Trillion-dollar deficits indefinitely, and a “dirty war”
• FDIC’s shortfall grows, as does its “problem bank” list
• Wonkish readers question our stats, especially as applied to Luxembourg… really

  “How dare you insult the fat guy with the mom tattoo.” We begin this morning with a reader outraged by our comment on the SEC’s weak settlement with Bank of America.

“His petty crime,” the reader continues, “does not compare with these large-scale, large-number thefts. I am sure he didn’t do whatever he did with as much scheming and planning and help from the government.”

Can’t argue with that. Nostra culpa.

  Following yesterday’s episode, we did some back-of-the-envelope math. The $150 million ruling in favor of BofA shareholders shakes out to roughly 1.7 cents per share. John Thain’s nose hairs would fetch more than that on eBay.

And… we learn this morning Bank of America is being allowed to dilute shares even further by cutting loose another stock offering. “The bank needs capital to pay back outstanding government loans,” comments the intrepid Ian Mathias. “The new executive board says they don’t know how else to raise the money.”

Boggles the mind. You can read the muck Ian raked yesterday, here. But we must warn you, it isn’t pretty.

  New home sales plunged in January to their lowest level since the Commerce Department started keeping records in 1963.

That’s an 11.2% month-to-month drop. All the gains made last year? Poof. Gone. The “bottom” of the market that mainstream analysts thought occurred a year ago is instead either happening now or still hasn’t happened yet.

Add that to the dismal Case-Shiller numbers we brought you yesterday and we have to ask members of Congress: How’s that extension of the homebuyer tax credit working out for you?

  More cheery news: The Conference Board’s consumer confidence index has dropped to its lowest level since last April. In January, the number was 56.5. This month, 46, way below even the most pessimistic mainstream predictions. Which is not really a surprise, given the challenge on the jobs front.

  For the first time since August, “mass layoffs” rose in January. That’s what the Labor Department defines as job cuts of at least 50 people by a single employer. 182,000 workers were affected, nearly half in manufacturing.

  How’s this for irony? One of the mass layoffs that’ll show up in next month’s report is Monster.com — the job search site. It’s cutting 200 jobs in a “restructuring.”

  The Gallup polling firm has stumbled upon its own BS detector for unemployment figures from the Labor Department. 19.9% of people surveyed last month say they were unemployed or underemployed. That would be equivalent to an official unemployment rate of 16.5%.

The American people themselves say the government’s broadest measure of unemployment undercounts by a factor of about 20%.

Gallup’s figure comes within a respectable distance of the real-world estimate compiled by John Williams of 21.2%.

  Where is all this headed? Marc Faber has gone a step further with his forecast that “all governments will eventually default, including the U.S.” He laid out the prospect of a “dirty war” this week in Tokyo, during a speech delivered to 700 managers of hedge funds and pension funds.

“What are you going to do when your mobile phone gets shut down or the Internet stops working or the city water supplies get poisoned?”

“When I tell people to prepare themselves for a dirty war, they ask me: ‘America against whom?’ I tell them that for sure they will find someone.”

Faber has long seen war as the ultimate distraction from debts that can’t be repaid… and he said specifically the U.S. budget deficit will remain above $1 trillion a year. (The Obama administration says it’ll get back below that figure by fiscal 2012.)

You don’t have to manage a multibillion-dollar fund to hear Faber speak in person. He’s returning this year to the Agora Financial Investment Symposium, where he was a showstopper last year.

We just crunched the numbers on the investment recommendations delivered by nine experts during the conference, and the average gain since then is 59%… including a couple of standouts up 278% and 803%. If you want in on this year’s recommendations, early bird registration discounts still apply, but not for much longer.

  Ho, hum. As we write, Fed Chairman Ben Bernanke has begun flapping his yap in front of Congress during his twice-yearly august testimony.

No surprises here. Economic conditions “are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” And the Fed will get around to tightening “at some point.” We could recite this in our sleep by now.

The increase in the discount rate last week? As we thought it would be… just a head fake. Psych!

Traders are still lifting their drowsy eyelids after receiving this nonnews from the ether. Gold perked up slightly to $1,100, the dollar index has fallen a bit to 80.65 and the major U.S. stock indexes have recovered nearly all of yesterday’s losses. Remarkable, given all the delicious gloom above, don’t you think?

  “The bullish action last week in almost ALL asset classes confirmed temporary price stabilization, at minimum,” Alan Knuckman explains from his post in Chicago, “and possibly a march back to recent multimonth highs.

“Good signs across the board include crude oil rising up to over $80 a barrel and almost 15% off of the three-month lows seen just two weeks ago. This rally signals continued strength in the global recovery via demand support that is poised to test January highs at $85.

“Take a look at crude oil and the broad market S&P over the last month:

“Every major asset sell-off attempt to break the uptrend established from the March 2009 extreme market lows has rebounded with new relative highs.”

Readers of Alan’s Resource Trader Alert bagged crude oil gains of 29%, 59% and 106% last year. Here’s where you can get in on his next resource play.

  The FDIC is even more broke than it was three months ago. The fund the FDIC uses to “insure” your bank account went $20.9 billion in the red during the fourth quarter of 2009. That’s more than twice the deficit reported when the fund first entered negative territory in the previous quarter.

Incredibly, the FDIC is still trying to reassure us that all is well because it’s collecting three years of advance payments on the annual assessments paid by its member banks. The fees total $45 billion — barely twice the amount of the current deficit. Yeah, we feel better.

On top of that, the FDIC’s list of “problem banks” grew during the fourth quarter from 552 to 702. That’s the highest number since 1993 (when, we presume, more independently owned banks were around, so it’s worse than it sounds).

Hmmm, let’s see. The number grew 27% in just one quarter. At this pace, every bank in the country will be on the problem list by the fourth quarter of 2012.

  Another tidbit from the FDIC’s report: Bank lending last year dropped at the biggest clip since 1942.

Of course, in that year, the entire economy was shifting to a war footing. So it’s safe to say what we’re seeing now is another unprecedented postwar occurrence. The report confirms data released by the St. Louis Fed earlier this week that show commercial and industrial lending have fallen off a cliff.

As long as banks can continue to borrow from the Fed at 0.25% and park it in 10-year Treasuries for nearly 3.7% (and leverage it up, of course), we don’t see this changing much.

  “I cannot see the value in comparing external debt to GDP,” a reader writes, reacting to our list of countries threatened by economic contraction. “Most of the countries in your list are doing just fine.”

“Let us look at one’s personal finances for a practical example. Including my house and car, my external debt is close to $500,000. Why should I compare my annual income with that? What should be compared is my ability to repay over the next 20 years. What is my ability to repay? My bank does not want me to be spending more than 30-35% of income on debt repayment. Perhaps that could be a good number to shoot for.”

“It is prudent borrowing and lending that finances the economy. Without an initial increase in borrowing/money supply, there can be no fiscal growth. I do not know what percentage of national income is used to repay debt, but if isn’t in the 30% bracket, America needs to raise taxes!”

The 5: As far as we can tell, no portion of the “national income” is going to pay of the debt. The share the government needs to pay in interest alone is skyrocketing. But for a more objective answer, we dive into the paper prepared by professors Ken Rogoff and Carmen Reinhart…

· When external debt-to-GDP reaches 60%, annual growth declines by about 2%

· When external debt-to-GDP reaches 90%, annual growth is cut roughly in half.

“In light of this,” they write, “it is more understandable that over one half of all defaults on external debt in emerging markets since 1970 occurred at levels of debt that would have met the Maastricht criteria [for entry into the European Union] of 60% or less.”

They caution this is no guarantee that more advanced countries will go down the same road to default… but the figures are “indeed disconcerting.” Just this week, Rogoff said it’s typical for “a bunch of sovereign defaults” to follow on the heels of a banking crisis within “a few years.”

“I don’t believe your debt to GNP numbers of Luxembourg. Please explain them and give clear reference.”

The 5: We’re not entirely sure about them ourselves. But this reader offers some help:

  “Luxembourg is a small country closely integrated with neighboring countries. By population, it has just 500,000 people, less than 5% the population of Greece. People there speak Luxembourgish (basically a German dialect) as well as German and French.

”If you view it as an isolated country, it has a lot of external debt, but it probably contributes little to the external debt of the EU. Luxembourg specializes in banking, particularly private banking. It would make more sense to compare Luxembourg with the Cayman Islands or Hong Kong than with the PIIGS, but even these would not capture Luxembourg’s distinct economic situation.”

Regards,

Addison Wiggin

The 5 Min. Forecast

P.S. Congratulations to readers of Bill Jenkins who closed out their Swiss franc play yesterday for 83% gains in just over a month. That’s the way you play a financial crisis, eh? Bill is watching his charts for his next high-potential forex recommendation. To make sure you get the alert as soon as it goes out, here’s where to go.

P.P.S. Good news. We’ve had a cancellation for our “chill weekend” at Rancho Santana in Nicaragua March 24-28. So that means a spot has unexpectedly opened up. Reserve members interested in joining like-minded folks for a romp in the surf — which I have to tell you is sounding like a better and better idea as another Nor’easter bears down on our beleaguered HQ — drop a line to Marc Brown for more information.