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The big-picture trends now in motion couldn’t be more supportive: Just since last August 27, when Fed Chief Bernanke first revealed plans to pump an additional $600 billion of printed money into the economy, the CRB Commodity Price Index has exploded nearly 30 percent higher … oil is up 32 percent … gold is up 14 percent, and silver has surged by a remarkable 69 percent.
Meanwhile, although Mr. Bernanke is still keeping a lid on short-term interest rates, he has been powerless to prevent long-term rates from rising sharply.
So, are you ready for this? Have you taken the necessary steps to prepare for higher inflation and interest rates?
Most individuals and institutions haven’t. After decades of relatively minor consumer price changes and years of easy money, they’re more complacent — and more vulnerable — with respect to this new surge than at almost any time in modern history.
In fact, the lack of preparedness is so deep and widespread, any significant uptick in the cost of goods, the cost of services, or the cost of borrowing could send a series of three shock waves through the U.S. economy:
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Shock wave #1
Many U.S. Banks Could Suffer Large
Losses From Rising Interest Rates
More than one year ago, the FDIC itself warned of the dangers of rising interest rates in its report, “Nowhere to Go but Up: Managing Interest Rate Risk in a Low-Rate Environment.” (Click here for the report with my annotations and key sections highlighted.)
The FDIC’s primary conclusions:
- With interest rates at record lows, they have nowhere to go but up.
- More banks are now taking on higher levels of interest-rate risk, leaving them overly exposed to rate rises at precisely the wrong time. They’re stuffing their portfolios with long-term mortgages, which invariably fall in value when interest rates rise. And they’re relying too heavily on short-term financing, which will inevitably be more expensive when rates rise.
- For nearly 20 percent of U.S. banks, long-term assets now make up more than HALF of their total assets — nearly double the level of 2006. This means that over 1,500 U.S. banks could suffer losses in half or more of their portfolio when rates go up.
The big picture: Too many banks were — and are — making the classic mistake of borrowing short and lending long. That’s a profit and earnings killer. Because when interest rates go up, they pay more for their funds and lose more in their portfolios.
Already, even before those banks feel the pain of rising interest rates, banks are failing at the fastest pace in recent history:
From the beginning of 2010 through Friday of last week, 180 U.S. banks have failed, including 25 with over $1 billion in assets.
Their names:
• First Regional Bank in Los Angeles with $2.18 billion …
• First Community Bank in Taos, New Mexico, with $2.3 billion …
• Eurobank in San Juan with $2.56 billion …
• TierOne Bank in Lincoln, Nebraska, with $2.8 billion …
• Midwest Bank and Trust of Elmwood Park, Illinois, with $3.17 billion …
• Amcore Bank in Rockford, Illinois, with $3.4 billion …
• Riverside Nat’l Bank of Florida in Fort Pierce with $3.42 billion …
• Frontier Bank of Everett, Washington, with $3.5 billion …
• La Jolla Bank with $3.6 billion …
• R-G Premier Bank of Puerto Rico with $5.92 billion …
• Westernbank Puerto Rico with $11.94 billion, plus …
• Another 13 banks with $1 billion to $1.7 billion in assets.
These are not small bank failures. Far from it! Every $1 billion, $2 billion, $3 billion — let alone $12 billion — caught up in the process of bankruptcy can add up to a lot of money very quickly.
All of these failures were caused by old problems that you already know about — home foreclosures, souring commercial real estate, and all the sordid consequences of the debt crisis. The next serial killers of financial institutions — rising inflation and interest rates — have yet to kick in.
Yes, all deposits up to $250,000 are covered by FDIC insurance. But the FDIC does not guarantee your interest rate, lines of credit, and other business with your bank. Nor does it protect you from losses in bank shares, bank debentures, or uninsured deposits.
To protect yourself from these dangers, you need to KNOW which banks are most likely to fail and which are most likely to survive.
But, alas, the folks at the FDIC won’t tell you.
They say their mission is to protect the consumer, but their first priority is always to protect member banks.
They have long maintained a list of “problem banks” that are at risk of failing, but they never reveal the names of the banks on the list. (They publish only the aggregate assets and total number of institutions on the list.)
Moreover, they keep telling the public that America’s banking problems are manageable or even diminishing, but their own list of problem banks keeps growing larger.
In fact, the list has just grown again for the 17th consecutive quarter — from less than 200 in 2008 to 884 now. But I repeat:
They won’t tell you if your bank is on the list or not. It’s one of the closest guarded secrets in the financial world, and you have absolutely no way of knowing.
Our mission is to protect you — not the banks. This is why …
- Weiss Ratings, our bank and insurance ratings division, gives a letter grade — from A to F — to nearly every bank and thrift in the United States … so we can warn you, well in advance, if your bank is vulnerable to failure.
- Our list of weak banks has been far larger than the FDIC’s “problem bank” list.
- And ever since we first began rating banks over two decades ago, we have warned consumers away from nearly every bank — big or small — that subsequently failed, while also steering them to the truly safe banks.
It’s also why Weiss Ratings has just completed a major study of the banks serving the public to determine which are the most vulnerable to rising interest rates. Here are the largest …
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My forecast: When inflation and interest rates rise, expect financial difficulties among many of the weak banks on this list (with a rating of D+ or lower). And expect hits to earnings — or even losses — among almost any bank on this list, regardless of its rating.
Shock wave #2
The U.S. Recovery, Already Faltering,
Could Crumble, Die, and Backfire
By nearly all measures, this is one of the weakest economic recoveries on record — with nearly one out of five American workers unable to find full-time employment and with the highest percentage long-term joblessness in recorded history.
This has also been the most expensive recovery for taxpayers — requiring massive infusions of printed money from the Fed, trillion-dollar federal deficits for years in a row, huge increases in state taxes in the making, and more.
Now, throw rising inflation and interest rates into the mix, and what do you get? The answer is both obvious and inevitable. You get:
- Trillions of extra dollars sucked out of the pockets of consumers to cover surging fuel, food, and living expenses.
- Millions of Americans who are no longer able to refinance their homes, and …
- Millions more who can no longer afford to borrow for the purchase of new homes.
Most important, inflation is likely to throw a monkey wrench into the government’s printing-and-spending spree to stimulate the economy.
Remember: Virtually everything Fed Chairman Bernanke has done in recent years has been predicated on the premise that “inflation is not a problem.” As soon as that ceases to be true, the main engine behind the recovery sputters and dies.
Also remember: One reason the U.S. Treasury Department has been able to get away with such huge deficits is because of low interest costs. As borrowing costs rise, the financial burden of the deficit — and the drag on the economy — grows by leaps and bounds.
Shock wave #3
Investors Who Are Not Prepared Could
Suffer Lost Income or Outright Losses
That includes not only investors stuck in failing banks, but also anyone who …
- has long-term bank CDs at today’s low rates …
- buys and holds long-term, fixed-rate muni bonds, government bonds, corporate bonds, or annuities …
- buys and holds shares in heavily indebted companies …
- owes money on a variable rate mortgage, or …
- is heavily invested in real estate!
There’s no reason in the world to expose yourself to these huge risks — especially now that you are fully aware of growing upward pressures on interest rates and surging energy and food costs.
Nor is there anything preventing you from buying hedges against each of these risks — for both protection and pure profit. For example …
You can buy ETFs like TBT (leveraged 2 to 1) and TBF (not leveraged), which are designed to go up whenever the yield rises on Treasury bonds of 20 years or more.
You can buy gold and silver bullion ETFs (such as GLD and SLV), which are likely to continue soaring as inflation and inflation fears spread.
Good luck and God bless!
Martin