Fed Offers Bailout of European Banks

FORECASTS & TRENDS E-LETTER
by Gary D. Halbert

September 20, 2011

IN THIS ISSUE:

1. Fed to Loan US Dollars to Europe’s Banks

2. See My Blog Posting on Fed Meeting Tomorrow

3. The Latest Census Bureau Report on Poverty

4. Food Stamps Hit New Record High

5. Be Sure to Join My Blog

Introduction

The news this week will be dominated almost entirely by the Fed Open Market Committee (FOMC) policy statement tomorrow afternoon (Wed). Why? News broke late last week that the US Fed has agreed to make unlimited loans (swaps) to the European Central Bank (ECB) in US dollars to help with Europe’s banking crisis. But I doubt we will see anything about this in tomorrow’s Fed policy statement.

The FOMC is expected to formally announce its so-called “Operation Twist” policy aimed at further reducing medium and long-term interest rates. All eyes will be focused on the Fed’s policy statement tomorrow afternoon. Whatever comes out tomorrow, I will post my thoughts and analysis on my BLOG sometime tomorrow afternoon at www.GaryDHalbert.com. You can go there to subscribe, it is very simple and best of all, it’s free.

Following that discussion, I will bring you the highlights from the latest Census Bureau report showing that a record high number of Americans are living at or below the poverty level. Also, a new Department of Agriculture report tells us that more Americans are dependent on food stamps than ever before. Almost 15% of Americans and families now rely on food stamps.

Finally, I want to once again encourage you to sign up for my new BLOG. If you want to have access to everything I write, you need to go to  www.GaryDHalbert.com and register to get my Blog. I have written seven different articles in the last month that you have not seen unless you have subscribed. Best of all, it is free and it is very simple to sign up.

Fed to Loan Unlimited US Dollars to European Banks

One might conclude that the big news this week was President Obama’s speech on Monday when he called for higher taxes on the wealthy and corporations, which he says will trim an estimated $1.5 trillion from the national debt over the next 10 years. But that is hardly big news since the president has been urging this frequently since he took office.

Tomorrow (Wed.) afternoon, the Fed Open Market Committee (FOMC) will announce its latest monetary policy at the conclusion of an expanded two-day meeting. The Fed is widely expected to announce its so-called “Operation Twist” which is designed to lower long-term interest rates even further – a move which may or may not prove successful on several levels.

Yet the really big news came last Thursday when the Fed agreed to make unlimited loans (swaps) of US dollars to the European Central Bank (ECB), which will in turn make short-term loans to European banks that are believed to be in trouble. This swap arrangement was initially set up during the financial crisis in 2008 but has been idle in recent years. Now it appears that the floodgates are about to be reopened in a big way.

While most of the Fed loans will go to the ECB, the Fed indicated that it may make other loans directly to large banks in Europe through “swap lines” whereby the Fed accepts equivalent amounts of euros as collateral. While it’s probably safe to assume that the Fed knows how to hedge this currency risk on the euros it will accept in exchange for US dollars, the greater concern is default risk.

Some US officials downplay the default risk and argue that the loans have no risk since the ECB has supposedly “guaranteed” that the Fed won’t lose money on these loans. Guaranteed by what? Euros? You’ve got to be kidding! Sadly, no.

It is clear now that Treasury Secretary Geithner’s last-minute trip to Europe on September 9 was to meet with the G-7 leaders and assess just how bad the financial crisis is in Europe. Obviously, the assessment was VERY BAD, although Geithner has not said so publicly since he returned to the US on September 10, following the G-7 meeting.

This explains the announcement last Thursday that the Fed will make unlimited amounts of US dollars available to the ECB, and perhaps directly to European banks, at least until the end of this year. The decision was made as an effort to solve the acute US dollar shortage in Europe and to hopefully stem the growing financial crisis across the pond.

In my view, the Fed is taking a huge risk with our money. And we don’t even know remotely how much money the Fed plans to make available to the ECB and banks in Europe.  An unusual amount of attention is focused on tomorrow’s FOMC policy statement with the thought that the Fed may say something about this latest swap arrangement with the ECB.

However, I doubt that the Fed will say anything in the policy statement tomorrow about making new US dollar loans to the ECB and European banks directly. This new, unlimited commitment by the Fed is being kept very quiet, and the mainstream media has ignored it for the most part (another good reason to read my E-Letters and blog posts).

Most likely, we’ll have to wait until mid-October when the minutes of tomorrow’s FOMC meeting are released. It will be most interesting then to see the banter between the various members of the FOMC regarding this new commitment of unlimited US dollars for the ECB and European banks.  

Given the importance of tomorrow’s Fed announcement, I will post my thoughts and analysis on my BLOG sometime tomorrow (Wed.) afternoon. If you want to receive those comments, go to www.GaryDHalbert.com and subscribe.

The Latest Census Bureau Report on Poverty

Last Tuesday, the Census Bureau released its annual report on poverty for 2010.  The number of people living in poverty was the highest ever. On a percentage of population basis, it was the highest since 1993. Note that the current poverty level is $22,314 total yearly income for a family of four. Here are some of the highlights of the report, with some comments to follow:

Income, Poverty and Health Insurance
in the United States: 2010 - Highlights

The data presented here are from the Current Population Survey (CPS), 2011 Annual Social and Economic Supplement (ASEC), the source of official poverty estimates. The CPS ASEC is a sample survey of approximately 100,000 household nationwide. These data reflect conditions in calendar year 2010.

  • The official poverty rate in 2010 was 15.1 percent — up from 14.3 percent in 2009. This was the third consecutive annual increase in the poverty rate. Since 2007, the poverty rate has increased by 2.6 percentage points, from 12.5 percent to 15.1 percent.
  • In 2010, 46.2 million people were in poverty, up from 43.6 million in 2009—the fourth consecutive annual increase in the number of people in poverty.
  • Between 2009 and 2010, the poverty rate increased for non-Hispanic Whites (from 9.4 percent to 9.9 percent), for Blacks (from 25.8 percent to 27.4 percent), and for Hispanics (from 25.3 percent to 26.6 percent). For Asians, the 2010 poverty rate (12.1 percent) was not statistically different from the 2009 poverty rate.
  • The poverty rate in 2010 (15.1 percent) was the highest poverty rate since 1993 but was 7.3 percentage points lower than the poverty rate in 1959, the first year for which poverty estimates are available.
  • The number of people in poverty in 2010 (46.2 million) is the largest number in the 52 years for which poverty estimates have been published.
  • Between 2009 and 2010, the poverty rate increased for children under age 18 (from 20.7 percent to 22.0 percent) and people aged 18 to 64 (from 12.9 percent to 13.7 percent), but was not statistically different for people aged 65 and older (9.0 percent).

Real Median Household Income by Race and Hispanic Origin: 1967 to 2010

Here are a few more highlights I plucked from the report:

  • Doubled-up households are defined as households that include at least one "additional" adult: a person 18 or older who is not enrolled in school and is not the householder, spouse or cohabiting partner of the householder. In spring 2007, prior to the recession, doubled-up households totaled 19.7 million. By spring 2011, the number of doubled-up households had increased by 2.0 million to 21.8 million and the percent rose by 1.3 percentage points from 17.0 percent to 18.3 percent.
  • In spring 2011, 5.9 million young adults age 25-34 (14.2 percent) resided in their parents' household, compared with 4.7 million (11.8 percent) before the recession, an increase of 2.4 percentage points.
  • The number of people with health insurance increased to 256.2 million in 2010 from 255.3 million in 2009. The percentage of people with health insurance was not statistically different from 2009.
  • Between 2009 and 2010, the percentage of people covered by private health insurance declined from 64.5 percent to 64.0 percent, while the percentage covered by government health insurance increased from 30.6 percent to 31.0 percent. The percentage covered by employment-based health insurance declined from 56.1 percent to 55.3 percent.
  • Since 2007, the year before the most recent recession, real median household income has declined 6.4 percent and is 7.1 percent below the median household income peak that occurred prior to the 2001 recession in 1999. The percentages are not statistically different from each another.

Poverty Up & Incomes Down

The highlights displayed above depict a sad situation in America, and one that is getting worse. The official poverty rate was 15.1% in 2010 making one in six Americans extremely poor. The number of families living in “deep poverty” – those making 50% of the official poverty level of $22,314, or around $11,000 – was the highest it’s been since 1975.

The number of kids under the age of six living in extreme poverty is up to nearly 12%. The recession has been especially hard on women and people of color. The extreme poverty rate for women is more than 6%, the highest recorded in 22 years, and the poverty rate for black women is up a percentage point from 2009, to more than 25%.

Blacks and Hispanics experienced the greatest poverty levels, with the poverty rates among those groups coming in at double the rate for non-Hispanic whites.  The South saw the greatest increase in its poverty rate, rising at double the rate of the Northeast, Midwest and West.

Brookings scholar Isabell Sawhill, who crunched the Census numbers, estimates that by 2014, the "Great Recession" will have added an additional 10 million people to the ranks of the poor, six million of them children.

As illustrated in the chart below, median income has sunk to where it was 15 years ago. The Census reported that the median income fell to $49,445 in 2010, down 2.3% from 2009. It was the first time since the Great Depression that median income, inflation adjusted, had not risen over such a long period.

Median household income, adjusted to 2010 dollars

Food Stamps Hit New Record High

Nearly 15% of the US population relied on food stamps in May (latest data available), according to the United States Department of Agriculture, and it is probably even higher today. The number of Americans using the government's Supplemental Nutrition Assistance Program (SNAP) – more commonly referred to as food stamps – shot to an all-time high of 45.8 million in May, the USDA reported. That’s up 12% from a year ago, and 34% higher than two years ago.

Food Stamp Use

In 2008, about 28.2 million people used food stamps compared to about 33.5 million in 2009 and 40.3 million in 2010.Currently, over one in seven Americans receive food stamps, the highest share of the population ever to do so, according to the Food Research and Action Center.

The program provides monthly benefits to low-income individuals and families, which they can use at stores that accept SNAP benefits. To qualify for food stamps, an individual’s gross income can’t exceed $1,174 a month or $14,088 a year. A family of four can qualify if its gross monthly income does not exceed $2,389 or $28,668 a year.

The average monthly food stamp benefit was $133.80 per person and $283.65 per household in May. The highest concentration of food stamp users were in California, Florida, New York and Texas – where more than 3 million residents in each state received food stamps in May.
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Join My Blog

Once again, I would encourage you to sign up for my Blog at  http://www.garydhalbert.com/. You can elect to receive my frequent postings automatically as e-mails, or you can elect to access them through the RSS reader. You can read as often you wish, and you can even make comments. I hope you’ll join us! Note: we never sell, rent or trade your e-mail address.

And remember that I will have a Blog posting sometime tomorrow afternoon regarding the Fed’s policy statement and what it may mean for the markets. Until then…

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES

Rasmussen: Reviewing Last Week’s Polls
http://www.rasmussenreports.com/public_content/politics/weekly_updates/
what_they_told_us_reviewing_last_week_s_key_polls

Fed Opens Its Vaults to European Banks
http://www.washingtonpost.com/business/economy/federal-reserve-boosts-
flow-of-dollars-to-european-central-bank/2011/09/15/gIQA2YcpVK_story_1.html

European Dream Lies in Ruins (Good read)
http://www.realclearpolitics.com/2011/09/18/the_european_dream_lies_in_ruins_263719.html


Forecasts & Trends E-Letter is published by ProFutures, Inc. Gary D. Halbert is the president and CEO of ProFutures, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, ProFutures, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.

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