Today, the world's major central banks joined together to provide emergency U.S. dollar loans to Europe and other troubled nations. Markets and metals are screaming higher on the news.
Under the program, the Federal Reserve lends dollars to other central banks, which then make dollars available to banks. The loans are known as "U.S. dollar swap lines." To make it easier for the central banks to access the dollar swaps, the Fed also slashed the interest rates it charges in half, from 100 basis points to 50 basis points. (A basis point equals 1/100th of a percentage point… so essentially the rates went from about 1% to 0.5%.)
"The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity," said a statement issued by the six central banks – the Federal Reserve, the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank.
Except it's not going to work out like that…
The Fed opened dollar swap lines during the subprime crisis to help the domestic banking industry. As a result, plenty of money flowed into banks. But those banks didn't then lend to households and businesses, as the above quote implies. They held onto that cheap money to bolster their balance sheets. And they used it to buy government-guaranteed loans that paid them a lot more than swap lines cost them. The "spread" – the difference between what they paid and what they received – swelled the banks' earnings lines. This time won't be any different.
And today's efforts are just the beginning. Consider this... As of November 23, the world's central banks have only drawn $2.4 billion in loans from the Fed. During the financial crisis in 2008, they borrowed $580 billion.
At the same time Europe and the Federal Reserve agreed on a way to paper over Europe's bad loans… The People's Bank of China cut reserve requirements for the nation's banks by 50 basis points today. That's the first easing since 2008.
Reserve requirements reflect the percentage of a bank's assets that regulators demand it keeps in cash. The rest is available for the bank to lend out. Cutting the reserve requirement frees more capital to slosh around the economy. Today's announcement drops China's reserve requirements from 21.5% for the biggest banks to 21%… freeing up about 390 billion yuan (about $61 billion) for the banks to lend, according to the Wall Street Journal. (The Federal Reserve requires the largest U.S. banks to keep about 10% in reserve requirements.)
So why inject more capital into the economy? Europe is China's largest trading partner. With Europe imploding, China's exports are hurting – in October, monthly exports rose by the smallest amount in two years. And the local property market is cooling down.
Chinese vice premier Wang Qishan, gave a dire outlook for the global economy... "Right now, the global economic situation is extremely serious. And in a time of uncertainty, the only thing we can be certain of is that the world economic recession caused by the international crisis will last a long time," state media reported Wang saying over the weekend.
The heads of China's biggest banks are all connected to the government. And they're regularly called in for meetings where they're told to either lend more or lend less (the joys of nationalized banking). China's commercial banks lent 587 billion renminbi in October, up from 470 billion renminbi in September... The easing has already begun.
All these actions mean one thing... A flood of cash will hit the market.
As we said… all this easing pushed precious metals higher. However, gold mining stocks haven't yet followed suit. They're trading at their lowest levels in at least nine years (even though profits should double this year with high bullion prices).
The benchmark NYSE Arca Gold BUGS Index (the "HUI") traded at 17 times earnings last week, the lowest since at least November 2002 – and far below the five-year average of 37 times. Gold stocks have fallen 4.7% this year, heading for the first annual decline since 2008. Meanwhile, gold is on pace for its 11th consecutive annual gain.
Gold stocks are "like a coiled spring," John Wong, portfolio manager at CQS Group's New City Investment Managers, said in a Bloomberg interview. And billionaire hedge-fund manager David Einhorn told his investors this month that "a substantial disconnect has developed between the price of gold and the mining companies."
Yesterday, our own Jeff Clark called a rally in gold stocks. But Jeff trades options on the stocks. If you want to know which gold mining stocks to buy, we recommend you read John Doody. He's one of the top gold stock analysts in the world. Over the past 10 years, Doody's favorite gold stocks (known as his "Top 10") have returned an average 43% a year.
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New 52-week highs (as of 11/29/11): Philip Morris International (PM).
We received lots of great notes from airline and IBM employees. Keep sending your feedback. We read them all... feedback@stansberryresearch.com.
"I was a Pilot for AMR. At the core of their problem is the cozy relationship between the unions and the government. The result of this relationship is that airlines are not allowed to fail after being raped by their unions. It therefore ends up being a 'Gresham's Law' of sorts in the industry where the bad airlines drive out the good.
"If the free market were allowed to apply to airlines; that is, that when an airline's costs exceeds its ability to cover those costs, it goes out of business, you might have a little different take on the industry. This sort of free market solution, while painful for a few, is good for the industry as a whole. Union members are stupid, but they do understand the implications of watching friends who work for the neighboring airline lose their jobs shortly after getting that 'industry leading contract.' Sadly this is rarely the case. They now only witness their friends get a slight setback as their airlines goes through the Bankruptcy process." – Paid-up subscriber Danny Wright
"I have first hand experience with airline bankruptcy. The judge awarded us a 42% pay cut. It was a blast. You mentioned most of the reasons airlines can't make money over the long haul, but you left out the biggest reason – the government. Add to your 'before you sell one ticket' list all the costs the government sucks out of these businesses. Think FAA (training and maintenance programs), TSA and HSA (security), Justice (route and antitrust approval), etc. The list is endless. I'd love to know the percentage of government jobs that exist solely to milk the airlines in the name of public safety. I don't think IBM has anywhere near the government oversight and drain on its resources." – Paid-up subscriber Larry
Regards,
Sean Goldsmith
New York, New York
November 30, 2011
Central banks devise European bailout... Why it won't work... China starts easing, too... Gold stocks at cheapest levels in nine years... Rick Perry slips, again... Airline employees speak up...