WEDNESDAY, OCTOBER 11, 2006

THE INTERNATIONAL FORECASTER

MIDWEEK READING

P. O. Box 510518, Punta Gorda, FL 33951-0518

An international financial, economic, political and social commentary.

Published and Edited by: Bob Chapman

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US MARKETS

            The stock market is feeding on the possibility that the Fed will cut interest rates again in January. At this juncture we do not think they will, not if they want to continue to attract capital. For the election the market may be strong, but we do not believe it will last. Just another classic manipulation. The risk still is definitely to the downside. The number two man at the Fed, Don Kohn, says he is more concerned about inflation than slowing growth because a recession is unlikely. We are already in recession. This man is supposed to be a solid economist. He has to be lying. We don’t believe he has lost his senses. Fisher expressed the same inflationary sentiments two weeks ago as has Philadelphia Fed’s Charles Plasser. If they were serious about stopping 10% plus inflation then they cut back on money and credit issuance and raise rates more. Thus, the commentary is a smokescreen. Inflation is rising and they do not know how to stop it on an intermediate and long-term basis. All the Fed regional presidents and Bernanke and Kohn are concerned about is the fall in the value of real estate. It has strong deflationary potential and that terrifies them more than anything else. That means they have to lend more to business and consumers who are buried in debt and get them to take on more debt to keep the system from collapsing. They all know once deflation takes hold the game is over. They are in a zone where the force could go either way. The Fed cannot retain credibility by raising interest rates and at the same time increasing money and credit, which neutralizes the higher rates. Like it or not, the Fed can be successful short to intermediate term to stopping deflation, but eventually they’ll succumb.

            You ask where does this lead too? The answer is a 1% GDP growth rate in 2007, 2008 and 2009 if we are lucky, and 2% rate denotes a recession. That is why inflation will rise as massive amounts of money and credit are pumped into the system until it simply won’t work anymore. Cash out financing and equity loans on today’s massive basis will end because interest rates have to rise or money won’t flow into our country from our creditors. In addition, in order to keep the dollar from collapsing through 80 on the dollar index, rates have to rise. The Fed members and Wall Street say otherwise, but 95% of the time we are right and 35% of the time they are correct. The likes of Fed Chairman Paul Volcker may have induced a blood-curdling recession, but he also saved our financial system by purging it. That is what has to happen again – like it or not. This could and probably will take us into depression because our debt today, which is 30 times as great as that of the 1980s. That’s too bad, but we created the problem and we have to pay for it.

            House prices are falling and will continue to do so for another 30% to 40%. Spending has been slowing off and on all year. That lower spending will accelerate over the next few years. It could be that ways will be found to increase more debt to extend the good times for another two years. Even if accomplished the price will be galloping inflation. The job market is simply a lie. The BLS figures are lies. We saw only 51,000 bogus jobs created last month. What happens when this is repeated month after month even with the birth/death ratio deceiving everyone. You can fool some of the people some of the time, but you cannot fool all the people all the time.

            The pace of consumption as we said is falling as is retail job growth, which has actually fallen sharply and is now negative. These figures usually lead the market lower by 3 to 6 months. That means no matter what the BLS does unemployment is going to rise. $60 oil is not going to prompt any recovery and if the Fed were to lower interest rates, inflation will rise and the dollar will fall inhibiting foreign dollar holders from investing in US dollar assets.

            The elitists are pushing hard to reform entitlement programs. In August, Henry Paulson in his first speech pushed for the revision, as did Ben Bernanke last week. For Congress it is political suicide. The hardest hit will be Social Security and Medicare, which are paid for pay-as-you-go. In other words, all that money paid in since 1935 went into the general fund and was used by politicians to keep themselves in office. Social Security is broke. By 2030, the cost will rise from 7% of GDP to 13% and to 15% by 2050. Except for 7% in 2005, health care costs have risen at double-digit rates for six years. How can any retiree hope to pay those exorbitant rates? We suppose the Republicans will just let the old useless eaters die. The easiest solution for Social Security is to move the minimum age to 70 or 72 years old. Medicare is an insolvable problem. Do not expect Congress to tackle the problem anytime soon.

            Before long there will be no labor unions and all the gains of the past 100 years will be history. The NLRB recently expanded the pool of workers exempted from union membership. Registered nurses who assigned others to some shifts or tasks were supervisors, thus not eligible to join unions. It is a bad decision because making out a schedule does not amount to management. This is the result of rampant anti-unionism among Republicans and particularly within the administration. This is nothing less than a vendetta. Union membership has fallen to 7.8% of the private workforce from 48% in 1948. The result has been a growing economy, rising productivity and lower wages, most of which has been the result of free trade and globalization or offshoring and outsourcing. The worker is now almost totally naked...

            Health care is about to become America’s biggest industry. Employment in manufacturing has fallen 18% since 2000, to 14.2 million and during the same period employment in private health services has risen 16%, to 12.5 million. Another 1.3 million are employed in government hospitals. Soon as many will be employed in health care as was employed in manufacturing. As health care becomes the core of the American economy our system of paying for health care remains sick, and is getting sicker. The rich don’t need health care, yet private insurers try to refuse coverage to those most likely to need it, and deny payment whenever they can get away with it. Cruelty and injustice are the inevitable result of the current rules of the game. Those preyed upon are not employer generated plans, but individual plans. Employer based insurance is in rapid decline, as companies adopt the Wal-Mart style minimum-benefit policies or no coverage at all. That is why many people are turning to individual insurance – only too often find out, that they didn’t get what they paid for.

            Every other nation supplies health care to all of its citizens, while spending less than we do. The problem is our destructive reliance on private insurers who want to squeeze the last nickel out of the insured. Medicare spends less than 2% of every dollar on administrative costs, while private insurance spend $0.80, much of the remaining $0.20 is spent denying insurance to those who need it the most. We will be forced into a universal system because of the greed of the insurers and those in the medical profession sooner or later.

            What is happening now is that entire retirement checks, for the 19% that receive them, is being devoured by medical premiums.

            Just as corporate America is cutting back on benefits the price of premiums and medical care are skyrocketing. Then there is restructuring and bankruptcy, which leaves people with no health care benefits. Healthy corporations are attempting to squeeze out more and more shareholder value for the 15% who control most of America’s wealth, as if they weren’t wealthy enough already. The rich shareholders want to lay the cost of medical care onto the government in Medicare and Medicaid, so the public pays the whole bill.

            On average, retirees account for 29% of the corporate medical bill for large employers that offer such benefits. Their bills rose 10.3% from 2004 to 2005, and last year they were up 7%. Retiree benefits are offered by just 1/3 of employers. Companies like Caterpillar, which is cutting insurance and pushing the difference onto retirees, made $1.05 billon in the second quarter. Corporatist greed knows no bounds.

            California stands out among the states with expensive housing costs. It ranked No. 1 in median house value, at $477,700; No. 2 in monthly housing costs for homeowners, $1,912; and No. 2 in monthly cost for renters at $973. Nearly half of California homeowners, i.e. 48%, spent more than 30% of their incomes on housing last year.

            Nationwide homeowners spent nearly 21% of their incomes on housing costs last year, up from just less than 19% in 1999. From 2000-2005 income has fallen 2.8%.

            Housing costs are excessive if they top 30% of household income. Nationally, 34.5% of homeowners with a mortgage had housing costs that topped that in 2005, an increase from 26.7% in 1999. New Jersey had the highest monthly housing costs for homeowners at $1,938. West Virginia was the cheapest $797. Hawaii had the highest monthly costs for renters at $479. Mississippi had the least expensive median home value at $82,700. San Francisco had the most expensive homes, with a median value of $726,700. Detroit had the least expensive at $88,700. San Diego had the biggest increase in median home values from 2000 to 2005, going from $249,000 to $567,000...

            Interest on the debt will rise from $184 billion in 2005 to $220 billion in 2006, up 20%. That $36 billion is the fastest  growing component of federal spending. It will be $249 billion in 2007 and $270 billion in 2008. That money will be flowing out the front door to other countries because they are holding $77 billion of 2005’s $184 billion or 42%. That’s money that probably won’t be spent in the US economy. It’s like the $21.5 billion that flowed to Mexico from illegal and legal aliens last year.

            As we predicted, although two weeks earlier than expected, the Eisenhower Carrier Strike Group deployed one week ago for the Middle East. It includes Destroyer Squadron 28; the guided-missile cruiser USS Anzio (CG68); guided-missile destroyers USS Ramage (DDG61) and USS Mason (DDG87) and the fast attack submarine USS Newport News (SSN-750), all from homeport Norfolk, Va. War is on the way.

            As we said previously, a recession began in January and 16 months ago in June 2005, the housing correction began. Consumer debt has reached record-breaking numbers. Spending levels of consumers can no longer be sustained. Homeowners will probably spend less and tighten expenses to save the homes they have. Wages are nowhere near offsetting inflation, benefits are disappearing, plants are being offshored and jobs outsourced and layoffs are spreading in spite of the BLS’s bogus statistics.

            Financial institutions are already grappling with a difficult interest rate environment and as a result real estate, including mortgages, home equity loans, and commercial loans, represented a record 33.5% of the US banking industry’s $9.298 trillion in assets in July, $3.115 trillion. This is the highest level since figures began in 1973. As the housing market heads toward the bottom, America’s banking system will be hit very hard...