-- Posted Wednesday, 15 November 2006 | Digg This Article
The following are some snippets from the most recent issue of the International Forecaster. For the full 32 page MidWeek Reading, please see subscription information below.
THE INTERNATIONAL FORECASTER
MID WEEK - NOVEMBER 15, 2006
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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International_forecaster@yahoo.com
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US MARKETS
The US and China accounted for about 43% of global GDP growth over the 2001-06 period. If the US has a recession the world and particularly China will suffer. In addition, there is an underlying weakness in private consumption outside the US. Real consumption growth in the second and third largest economies, Japan and Germany, will remain stuck at 1.5% next year. The Eurozone is 1.3%. By IMF estimates, consumption shares in all of emerging Asia fell from about 70% of GDP in 1970 to 50% in 2005. China’s private consumption share fell to a record low of 38% of GDP in 2005, and has fallen further in 2006. Consumption as a share of GDP in Japan fell from 58% in 2002 to 56% in 2006. The message is inescapable; euphoria over an Asian revival in consumption is premature and misplaced. They have no intention of taking up the slack. The region’s growth story has been and will continue to be dominated exports and fixed investments.
US consumption is $9 trillion or 20% larger than Europe, 3-1/2 times Japan’s, nine times that of China and 17 times that of India.
Everyone is dependent on the US for consumption to a great degree. Canada sends the US 84% of its exports and Mexico 86%. That is 24% of Mexican GDP. China sends 40% of its exports to the US or 15% of GDP. That Chinese slowdown would ripple through Asia. Once commodities fall, Australia, South Africa, New Zealand, Canada, Brazil and Russia will take a heavy hit as well. It is inescapable that a US recession would prove very difficult for these countries and many more. One of the big problems of free trade and globalization is that once the US slows so does the world. Being interconnected and being interdependent can be disastrous. Everyone is then vulnerable. Every country will face monetary destabilization. We expect the process to become noticeable next year as recession is recognized. In 2008, the recession in the US will spread internationally and finally commodities will correct. 2009 will be the big year. Will we have hyperinflation and depression? We think we will.
It is finally dawning on the experts that we have a very serious housing problem. After five years of overinvestment and speculation the experts believe there is a problem. This is 17 months after the peak that it is recognized as a major problem. Excepted from that is Sir Alan Greenspan who is trying to save his tattered reputation, Wall Street and in the halls of government. Over investment is so substantial that it will take several years to bring it back to normal. That means residential housing should drop an average 50% to 60% over the next several years. That means we could hit the bottom of the market in 2010.
What is keeping housing from falling further presently is still relatively low interest rates and the real inflation rate of 10-1/2%. We believe these will delay the implosion, but prices will eventually slip downward at a 15% per year rate. As you know our calculations show a 35% to 60% correction in house prices in the former hot areas. In the expensive homes in the hottest areas we could be a 60-80% correction. You have to remember we haven’t seen this kind of leverage since the late 1920s. In 1931, the Fed cut back on credit and money and the nation went straight into depression. This time they intend to inflate their way out of the problem and they full well know that won’t work either, They are just buying time. That also means gold and silver prices will go far higher than they should and that the dollar will fall to 55 on the dollar index, which could cause it to lose it reserve currency status.
Real inflation or hyperinflation, and a rise in interest rates, and the continuation of monetary-supported over-investment, cannot stop what is in process. The elitists are going to have a housing implosion and depression just as they planned. They can delay it, worsening the outcome, but they cannot avoid it.
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Last week the ECB concluded its two-day conference, “The Role of Money and Monetary Policy in the 21st Century.” The old school ECB remains firmly committed to monetary analysis, to which we as well subscribe, as the New Age Fed abdicates the monetary aggregates and, in the process, tosses it in the scrapheap. As we explained in the last issue this is an operation of slight of hand. Since 1982, the Fed has declared that interest rates reflect and determine policy when in fact obscured behind the scenes the manipulation of money and credit determine direction of monetary policy. Speaker, Fed Chairman Bernanke, lied and said monetary and credit aggregates played no part in policy since 1982. The suggestion that monetary policy can be conducted without assigning a prominent role to money is an oxymoron, a statement containing contradictory terms, or in simpler words, a stupid comment. It should be remembered if not etched in your minds that one of the important reasons for the Great Depression was the Fed’s failure to stabilize money supply. When they saw the error of their ways they slammed into reverse, and collapsed the US and world economy. The Fed in its role to further enrich itself and other elitists mega-wealthy deliberately refuses to understand the role of money and credit in the economy. It is not that they do not know, they do not care to know. Don’t bother us with facts and reality; we are too busy enriching Illuminists. The ECB and the BIS know what is going on and do not approve, but the Anglo-American axis does what it pleases. The Europeans see the attitude and the incredible risks that have been taken for wealth accumulation, mindless to danger. What has also evolved is other forces that create vast amounts of credit as well, so when we say money and credit is up 11-1/2% - that only reflects the Fed’s policies. There is no way to measure how much credit is created by derivatives, MBS, ABS, GSE debt and guarantees, structured finance and things you have never heard of nor will you hear of. Thus, the expansion of money and credit could easily be 14%. No one knows there is no way of measuring it and it is totally unregulated. You would think that would concern the Fed and the Bank of England but it doesn’t. It sure concerns the ECB and BIS and that is because it fosters insatiable demand and builds a giant pyramid of debt.
Another deeply dangerous note is the yen carry trade, which earlier this year the Bank of Japan said they were going to reduce via higher interest rates and drawing liquidity from banks. They began to pull liquidity and the banks and exporters screamed murder as the yen rose in value. Now the situation is back where it was before. A giant spigot of money at almost zero rates. Sooner or later the yen will rise as the dollar falls and the scramble will be on as we saw earlier this year to pay off yen loans and in the course of doing that there was a sharp sell-off of global assets. Most of the current carry trade money has flowed into risky cyclical assets and as we begin the economic slowdown these assets will fall in value and the specs will bail out to repay their yen debt again. That will feed on the yen as it rises in value. That will cause carry trade losses and bring markets and assets down further. Any correction, such as in US real estate, could trigger these forces, which could end up in chaos.
Due to a pause in the upward movement in interest rates it is believed the next step is to lower rates or at best the current supposedly neutral position. We are told over and over again inflation is well under control, which is a blatant lie. There is no evidence rates at this level positively affects stock market prices, that is left to manipulation. The real estate landing will not be smooth and soft.
That said we see a severe world economic slowdown beginning in 2007, which makes the IMF’s 5.1% GDP growth estimate way off the mark. Worst yet, we have a falling real estate market and rising inflation. The underlying rationale seems to be the assumption that this recession will be just another soft patch, forcing the Fed to return to easy money. We can assure you they are wrong.
House prices will fall. The only question is how far? This year mortgage withdrawals will be over $1 trillion. In 2005, households borrowed $1.2 trillion. In inflation adjusted dollars income was about $93.8 billion. There was little or no savings. We have had a very shallow recovering over the past five years with unprecedented losses in jobs. Anyone who thinks the next few years will be easy is mistaken.
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The world is raising interest rates - can the US be far behind? If they at all care about keeping the dollar above 80 on the dollar index they are going to have to raise rates that will expedite the decent into recession. That recession will negatively affect the entire world.
The world knows how vulnerable America will be over the next two years and our debtors now essentially control our destiny. If they reduce their purchase of dollar based assets the game is over. They, we believe, are waiting for the right opportunity to use their clout in off loading the dollar. They already know they are going to be 35% to 50% losers no matter what they do.
Monday morning at about 12:15 EST, CNBC commentators Sue Herera and Bill Griffeth were discussing the difficulties and repercussions of Chinese Yuan/Dollar adjustments. During that conversation, Sue Herera referred to China as being similar to a 51st state with Ben Bernanke being the chairman of the Bank of China as well as the Federal Reserve. The media arm continues to mentally prepare us for the transition to the world government.
It will be interesting to see if China obeys their current masters in the United States or if the 51st state decides to secede from the union. We think the later.
More gems from the central banker conference in Frankfurt last weekend. Mr. Bernanke said, “Heavy reliance on monetary aggregates (money and credit) as a guide to policy would seem to be unwise in the US context.” If so Ben what would you rely on? The Fed said last week they wanted to expand their equivalent of the CPI. The Fed doesn’t believe the CPI is reliable. In fact, reliance by the Fed, business and individuals on BLS or government statistics is an exercise in futility because they are all bogus. So Ben, what should we all rely on? Ben knows the bright know what he is up too. Keep your eye on interest rates as we secretly jack up money and credit to unsustainable heights. Jean-Claude Trichet understands the strong long-term link between money and inflation, but Ben or the elitists do not want to hear about that. Ben, like Sir Al before him, realizes that there are few options to remedy the effects of a collapsing real estate market, a slowing economy, 10% plus inflation and free trade and globalization. It is game over - the central bankers have again led us to financial, monetary and economic disaster.
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GOLD
We called the bottom of the May decline several weeks ago for gold and silver related assets. As we predicted they have rallied. We are currently pausing – waiting for the pending upward storm to break loose. $560 has now become a key support area for gold. Gold rises in anticipation of higher inflation, because it is a safe haven from the world’s reserve currency – our debt dollar and it rises during geopolitical tension and war. When things get bad and difficult gold rises and central bankers do not like that because it exposes what a terrible job they are doing.
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Due to the veteran’s Day holiday the COT report was late. The large commercials collectively combined net short positions jumped 22,620 contracts or 25% to 114,456 contracts. That means the lower gold prices we are now seeing could test the $610 to $620 zone.
Comex open interest added 11,555 contracts on the week to 335,036. It fell 8,117 the previous week.
The last time the commercials went this short there was no meaningful pullback for gold. Gold then turned and raced to $730, leaving the commercials with losses. We could be preparing for a monster upward move if history repeats itself. We do not know yet, and we won’t know until Friday how much of this new short addition has been covered. As well this could be just part of a back and filling process in a pause in an upward move.
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-- Posted Wednesday, 15 November 2006 | Digg This Article
