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               Paul A Drockton M.A.
            Fed's Bogus Stress Test
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Paul A Drockton M.A.
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The Federal Reserve will release another bogus "Stress Test" to the gullible American public Thursday.

"The supervisory stress scenario for CCAR 2012, which was designed in November 2011, depicts a severe recession in the United States, including a peak unemployment rate of 13 percent, a 50 percent drop in equity prices, and a 21 percent decline in housing prices." (Source)


In other words, the Federal Reserve is stating that it is trying to predict how many banks would become insolvent with the above scenario. One way of understanding bank solvency is what is called the tangible common equity (TCE) ratio:

"The tangible common equity (TCE) ratio is a useful number to gauge leverage of a financial firm. Specifically, it answers the question: "How much can the value of a bank's assets fall before the entire value of tangible* common equity is wiped out?"

For example, assume a bank as a TCE ratio of 5%. If the value of all of the banks assets fell by 5%, theoretically stockholders would no longer have a claim on the bank's tangible assets.

Another way of thinking about the TCE ratio of 5% is that the remaining 95% of the bank's tangible assets have been purchased using loaned funds that the bank must repay."


This simply means that a bank will borrow against almost all of its tangible assets. When those assets decline in value, it wipes out any real value stockholders can claim in the event of a default.

"The word tangible, in accounting, essentially means anything that can be touched or traded. Cash, buildings, accounts receivable, inventories and stock holdings of a business are all tangible assets. Trade secrets, patents, copyrights, and goodwill are not tangible assets, even though they may have value." (Ibid)


While the TCE is not part of the Feds formula, it should be part of every investor's way of looking at whether or not to purchase bank stocks. Unlike the Fed's stress test, the TCE is the real measurment of a bank's value to investors. It answers the question of what will be left in the event of insolvency.

Now, back to the Fed's stress test:

High Unemployment:  Using 13% unemployment is more than wishful thinking. As in, "you wish". Unlike the Fed, shadow stats measures chronic unemployment as well. They state that true unemployment is at 22%, almost double the 13% the Fed is using as a worst case scenario.

High unemployment is masked by government assistance. In other words, there are no riots as long as people get a government check, and that check does not bounce or become worthless through inflation. This will change in the near future, perhaps after the election.


50% Drop in Stock Market: This is what happened in 2002 and 2008. We are past due. I think it will be after the election this time. Only, it will be more like a 90% drop in the stock market.

A 21% drop in the housing market: If they are talking about the more than 50% drop in most markets since 2001 then this threshold was reached a long time ago. This is a warning to expect another drop in home values this year.


In other words, they will continue to plunder and print. The result will be rising consumer prices, which will be masked by deleting gasoline, and other important commodities from the Consumer Price Index. These are the same tactics the former Soviet Union used before its collapse.







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