-- Posted Wednesday, 6 December 2006 | Digg This Article
The following are some snippets from the most recent issue of the International Forecaster. For the full 34 page MidWeek Reading, please see subscription information below.
WEDNESDAY DECEMBER 6, 2006
MID WEEK READING
THE INTERNATIONAL FORECASTER
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An international financial, economic, political and social commentary.
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US MARKETS
Soon spending for the occupation in Afghanistan will be more than $88 billion and the cost for Iraq will be in excess of $420 billion. Early next year these figures will exceed the cost of Korea $361 billion, and Vietnam $531 billion, and will be closing in on the cost of WWII, all off budget of course.
This coming year there will be an additional $460 billion in the pipeline. Republicans are hoping to continue funding by passing continued spending resolutions and that isn’t going to happen. That means when George Bush requests another $130 billion in January, he is not going to get it all. Not only will Congress begin next year to turn against the war and it’s funding, but also so will England. This is in part why the elitists had Congress authorize the Iraq Study Group. They saw what was coming, public revulsion, and wanted to set the pace and control the withdrawal. There are hundreds of thousands of dead and maimed people in Iraq because George and the neocons and Tony Blair wanted war. This war has now lasted longer than WWII.
As these wars continue so does the costs. These costs you might say have pushed US debt over the edge. The dollar is again descending and soon will test the 80-level on the USDX, the Dollar Index, so the moment of truth will be had in 2007 for the dollar. From here on out the inflow of funds from foreign investors and central banks will fall. Once the flow falls below $3.5 billion a day the real trouble will begin. How can investors justify making dollar investments with the dollar falling? It is more prudent to sell the dollars and invest in something else, like gold, the only real money. If the funds flow stops and we go negative, which we will in 2007, then we cannot fund external wars and occupations, and the economy will head down quickly. A situation such as this feeds on itself. A negative current account deficit can only be funded by the Fed printing more fiat dollars, which will bring on hyperinflation. Interest rates won’t be able to be lowered to help the economy, because if they are lowered, dollar holders will dump even more dollars sending the dollar even lower. The fact is rates will have to be raised in an effort to stop the dollar selling. That will send the US and world economy into depression. There is no way out. The US government and the Fed are in a box, they cannot get out, and there is no way back.
The US is committed to long-term debt in excess of $70 trillion and short-term debt that will approach the statutory debt limit of $8.97 trillion in 2007. That short-term debt is up 51% in five years. There is no reason to believe that a policy of continued debt will persist indefinitely.
The recession began after our economic peak last January. For almost six months every day we have had an inverted yield curve. In each of the last six recessions since 1968, they have been preceded by the yields on the 10-year Treasury notes falling lower than the yield on three-month yields for a period longer than three months. Our economy has again met that criterion. Last week’s Purchasing Managers manufacturing index fell below 50 for the first time in several years. Three months under 50 and we will have another recession alarm go off. We write this so you can now take appropriate action. That is get out of the stock market and into gold and silver related assets and get rid of debt, particularly credit card and revolving debt, vehicle debt and other loans. Next year there is a good chance that one of two breadwinners in most families will be out of work. This could keep you from losing your home and perhaps save you from bankruptcy. We know Americans have too much debt. On 1/1/06, private borrowing amounted to $1.241 trillion. In the first half of 2006 alone, equity withdrawals exceeded $700 billion. Consumers borrowed 11% of GDP. What does the consumer do when his house value falls and it can no longer be used as an ATM machine? You got it, it is called recession and then depression. That means over the next few years the economy will contract by at least 10%. That will cause the biggest recession since WWII. That would send the dollar even lower because tax flows would fall and all government entities would be on the edge if not in bankruptcy. That means all those pensions would fall as the Dow falls 50%. This is going to shake the US and world financial system to its very foundations. The social chaos will be unbelievable, especially with 30 million illegal aliens roaming the streets. We face a meltdown of gigantic proportions and there is no way to avoid it.
If the US ceased importing goods, consumption would fall by 30%. That would solve the balance of payments deficit at least to some extent albeit painfully. That would bring world trade in balance. In that process the dollar would fall from 82 to 40 or 55. That would make US goods very competitive. We believe that would cause companies that offshored production to return to the US and for those outsourcing to cease doing so. Tariffs of many amounts should at the same time be added to the mix This way America could quickly repay its debts and the dollar would again start to rise against other currencies and perhaps eventually versus gold. The only other alternatives are default or creating preventative wars against your debtors. We do not believe the US would go to war versus the world.
You have heard us talk about the significance of 80 on the USDX, the US Dollar Index. Since 1972, that level had been tested three times in 34 years. On one occasion it did trade below 80 for 13 trading days in 1992. Its lowest during that period was 78.33. Our media has chosen to refrain from discussing the plunge in the dollar over the past two weeks probably hoping the market would move back up again. Those who have large dollar positions, such as Japan and China, of about $750 billion each, and Russia some $200 billion, are concerned but what else did they expect? You know the reasons for weakness in the dollar, but one not often spoken of is the narrowing of yields differential between the dollar and other major currencies. The ECB and Bank of England are raising interest rates again. That means the Fed should be raising interest rates ½% based on European rates, but if Mr. Bernanke does that it will expedite the housing correction and the US economy’s fall into recession. On the other hand, if rates remain the same the dollar will test 80 on the USDX and the economy will slide anyway. If rates are lowered the market and housing will go on hold and the dollar will fall to 55. In the latter scenario the collapsed dollar will take the market and housing down anyway. It will also bring into question the viability of the dollar’s future as the world reserve currency.
The dollar’s real problem is that it is a fiat currency as are all world currencies. It just happens the dollar is the most important world currency and has debt – personal, corporate and public - that is considerably worse than that of any other nation. A debt position of government that has risen from 1% of GDP in 1987 to 4% in 1995 to 42% of GDP just recently. In addition, the public has no additional savings. We are now witnessing the pinnacle of 21 years as a debtor. This dreadful financial position is being exacerbated by a Bush administration that has well ruined our respect and reputation. That is another reason our dollar is under sieze and that is that our country is run by liars. Once the dollar breaks 78.33 it is freefall. That will bring about the end of fiat currencies that began on 8/15/71. On Friday, December 7th, the ECB meets and will probably raise interest rates and on 12/2 the FOMC meets again. We believe that will be a non-event. Soon Paulson and Bernanke will return from China empty handed.
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What market trades $2 trillion a day? The foreign exchange market that is open 24/7 worldwide. It’s difficult to discern whether the major central banks are allowing the dollar to fall to impress the Chinese at the December 14-15 meeting in Beijing, or whether the Chinese are sellers along with many others. The Chinese are sitting with $750 billion in low yielding fixed income securities and rates have been falling. At the same time the dollar has been sliding. The pressure on the dollar started in early September after statements by Fangang, a member of the central bank’s policy committee. He said in October, “China risks an erosion of its holdings because the dollar will probably decline.” In late August he had said, The US dollar is no longer a stable anchor in the global financial system, nor is it likely to become one, therefore it is time to look for alternatives.” That is as inevitable as it gets and it’s plain the Chinese realize exactly what monstrous problems the dollar has. They know global central bank reserves have more than doubled to $4.9 trillion over the past three years, most of which are in Asian banks. In only six months China will have $1.5 trillion. They have some $750 billion in dollar denominated assets.
Our new Congress has already said the US has to reduce its reliance on foreign borrowing to avoid a steep rise in interest rates, but they offered no immediate solutions. They realize the interest is sapping US revenue. What has been a deliberate policy of George and the neocons is about to change – how we do not know. All we can say is this cannot change overnight - it takes years.
Since China dropped the dollar peg for its currency, the yuan has appreciated 5.7% and the value of its dollar holdings are off some 10%. China and Japan and other Asian central banks have been holding up the dollar. The question is will they do so indefinitely and the answer is no. The Chinese, Japanese and the Koreans know they’ll take a big hit the only question is how much and when. Korea quit dollar support two years ago and has taken over 20% losses as it diversified.
We would think Paulson and Bernanke would be putting pressure on China on December 14-15 by reminding China that the democratic Congress will soon be implementing protectionist measures if they are unsuccessful. It should be noted that Bush administration and part of Congress, as well as the Fed are responsible for most of our financial problems. They were the ones who wanted free trade and globalization and that in large part caused the deficit problem. If they hadn’t followed that course for the past 12 years China wouldn’t have the surplus it has and the US would have 20% higher economic output. We call it-assisted suicide. As we have said over and over a 35 to 50 percent lower dollar isn’t going to help the balance of payments deficit that much, because we don’t manufacture that much anymore. A lower dollar needs to be accompanied by trade tariffs. With both we can compete; pay off the deficit and all our debts. We can also bring many offshored business and outsourced American jobs home. What has been done to the American worker and our economy is unconscionable.
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During the coming year as the economy turns down it will become more apparent to the public that statistics the government and the Fed release are totally bogus. The feel good numbers are going to loose their effect and the public is going to be as outraged as they were at the last election over corruption. After 25 years of slicing and dicing the figures are all but worthless. These statistics, these lies, have been used to control wage claims, reduce pension increases and politically manipulate the electorate to believe that management of the economy is far stronger than it really is. This has been and continues to be systematic corruption of all of our economic indicators. It strongly points out the extreme cynicism and moral bankruptcy of both major political parties. It also points out how little concern these politicians have for their constituents. These games that have been played on the public will have far reaching consequences as the massive debt financed bubble begins to unravel. There are no savings so they cannot be affected, but those on pensions are getting hit from both sides, losses to inflation and relentless currency debasement. The bogus inflation numbers, of course, affect us all. As we have said over and over again the objective is to increase profit margins for elitist transnational corporations. They erode labor through inflation and manipulation of the CPI, they then outsource jobs to slave labor countries, they destroy all of the employees residual benefits, increase hours without additional compensation, get government to fund training initiatives and offer financial incentives to lure production and jobs to a state. Simply, become collateral damage for international elitist conglomerates. What else are sheeple good for? These corporatist fascists are waging a continual war against labor and against the people.
None of this has happened by accident. It has been planned this way. A way to control labor is in taxation and debt. If labor has no power to engage the employer it can be fired at will. That creates an atmosphere of fear. A fear of not being able to pay back debt. Not being able to service the mortgage the worker should have never had in the first place. The mortgage is a great burden when it consumes 35% to 50% of your take home pay. Such stress created by debt sometimes leads to abuse of tobacco, alcohol and drugs and in some cases eventually crime. This creates more turmoil within the social structure.
Debt at all levels of our economy has reached a saturation point and the unwinding of these debts will not be orderly, in fact, they could end up being chaotic.
If all this wasn’t enough our society has been burdened again by invasions and occupations, which are costing massive amounts of money and a horrendous cost in lives. We do not need more than 1,000 global bases and 14 naval carrier battle groups. We have not seen our last war. Like Rome there will be one key battle that will turn the tide of history. It could be nuclear war with China or it could be the collapse of the dollar and the loss of its reserve status. The latter at this stage is more likely.
As we said earlier the dollar is getting ready to test 82, 80, 78.33 and then 75 on the dollar index. Eventually they will all be broken and that could break America’s supremacy. Such a move by the dollar would as well create a debt avalanche. That will be devastating as homeowners face falling real estate prices and debt repayment as unemployment rises. America is in a state of moral, economic and financial collapse and is mired in corruption that always attends great power.
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GOLD, SILVER, PLATINUM, PALLADIUM AND DIAMONDS
We are told that gold is being considered again as a reserve asset by a number of central banks. They see trouble with the dollar and it could lead to the dollar no longer being the world’s reserve currency. It could be that a number of smaller central banks are bidders for gold at these levels along with China, Russia and India. Gold is acting very strong. This is surprising because gold lease rates are back down to .04%. This happens when the major central banks want to suppress prices. We will have to wait and see.
On Monday, early on gold was about unchanged. After the second London fixing gold was taken down $5.00, but it recovered smartly and closed at $645.20, up $0.10. Silver rose $0.08 to $14.05. Despite major attacks on gold and silver every day they come back strongly. They are ready to take off again. We are ready for $670 to $680. The February contract closed at $650.95, up $0.30, silver at $14.26, up $0.06, copper up $0.06 to $3.18 and the access market was $1.00 lower. Open interest fell 10,374 contracts to 338,758 as silver open interest rose 187 contracts to 106,854. On Friday, the big Tocom shorts reduced their shorts by 4,400 to 139,092. Goldman covered 179 of those contracts. The HUI closed the day very strong, up 6.30 to 360.18 and the XAU rose 1.67 to 148.85.
Last week there was a decrease in silver stocks of 448,236 ounces to a total of 107,770,405 ounces.
