SATURDAY DECEMBER 16, 2006
THE INTERNATIONAL FORECASTER
DECEMBER 2006 (#2) Vol. 10 No. 12-2
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
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Goldman Sachs is at it again – rigging the market. A few months ago they changed gasoline’s weighting in its commodity index and gasoline plunged. Recently the stock market averages have been acting unnaturally vaulting higher without so much as any correction. This has been triggered by a mysterious reduction in margin requirements for an already over-margined hedge fund community that has cranked up the markets since October. It is purely mystical why every time the equity markets look like they are set up for a downside correction, buying comes out of nowhere to drive the market back up. There are always mysterious buyers who appear at every correction juncture. We are sure the mystery buyers are our Working Group on Financial Markets and the Fed via the repo pool. If we did that we would go to jail.
The MBA’s quarterly snapshot reports that the percentage of mortgage payments that were 30 or more days past due for all loans tracked jumped 4.67% in the July to September quarter. The second quarter was 4.39%. This survey covers 42.6 million loans. Sub-prime borrowers, people with weak credit records or no records, had a delinquency rate of 12.56%, the highest in three years. The delinquency rate for these borrowers holding adjustable-rate mortgages was even higher at 12.22%, also the worst reading in more than three years. Higher interest rates over the past two plus years have financially strained people who were really stretched in the first place. The survey showed the percentage of mortgages that started the foreclosure process in the third quarter climbed 0.46%, up from 0.43% in the second quarter and that was the highest in nearly two years.
Economists are wrong 2/3’s of the time because they must serve their employers. Employers do not want negative forecasts so economists and analysts give them what they want to hear. That is why today, as most of the time, economists focus on the positives of our economy. That is characterized by a pause in interest rates, a sharp fall in oil prices, liquidity beyond the dreams of a Sultan or a King and supposed tame inflation. It gets serious when you believe your own lies. A very small minority of economists see gross imbalances, structural distortions both economic and monetary, a debt implosion, a credit explosion on the verge of implosion, all of which, along with outsourcing and offshoring, undermine economic growth that has already put us into recession.
We have had seven months of falling indicators, a falling housing market, a falling dollar and an inverted yield curve. Real GDP has fallen from growth of 5.6% in the first quarter to 1.6% in the third quarter. We really do not believe that Mickey Mouse revision to 2.2%. The scale of the false boom will be reflected in the same magnitude to downside, if not greater. Credit is at the basis of the destructive process and the current credit and housing boom has been the most expansive in world history. That means the correction will be of Titanic proportions, nothing like anything the world has ever seen before. Who with any sanity can justify outstanding mortgages increasing from $4.8 trillion in 2000 to $9.3 trillion in 2006? In five years mortgage growth has equaled that of the entire earlier 50 years. Who can justify such madness?
This housing boom not only elevated the value of real estate – it allowed the withdrawal of equity, which kept the economy afloat and created even more debt. A side effect was savings went to a minus 0.5%. Homeowners may, because this boom lasted almost five years, believe it was normal when in fact it certainly was extraordinarily excessive. Normally there would be a real tightening of credit and as prices fell inventory overhang would be worked off not only in housing but also throughout the economy, unfortunately this time it is different. Those things will happen over a longer period of time and the correction will be deeper because the economy is correcting throughout and all sectors will be hit this time if for no other reason than there will be massive unemployment and an inability to service debt. The system has to be fully purged and it will be.
Whether observers of the housing boom believe it or not, 6-1/8% 30-year fixed rate mortgages are quite supportive of borrowing and spending. By historical history only a rate higher than 7-3/8% would be restrictive. We can remember when professionals told us 10% was a super rate. Another factor is housing prices are not still rising. We covered that in the last issue, so with still cheap rates lower prices of 10% to 30% are reality in the former hot markets. The volume is off 50% and the discounts do not show up in the price. We have a housing price hiatus bound by affordability and to some extent liquidity that will continue until rates move. If they move down the downward pressure on prices will dissipate and the economy will moderate its fall, but the dollar will collapse. That collapse will force rates higher again in a more meaningful way. Then the economy, housing and the dollar will become victims.
As you read this the meetings in Beijing will still be in progress. The reason for the meeting at this time is that everyone on the inside knows the dollar is header lower and there will be significant adjustments out of the dollar and that it is time for the dollar to fall. As an aside, we do not believe that the central banks want to sell more gold or they simply do not have anymore to sell. The wish is for a controlled decline. This will involve coordination of selling and China as a high holder will want to be a seller along with others. OPEC members have been sellers along with Russia and they will continue to be and even Sir Alan Greenspan tells us the dollar is going lower. It would seem that China is the last to agree to the controlled fall of the dollar.
First 80 will be broken, then 78.33 and then a say 6-month sideways motion in the 70 to 75 area. Then the break to 55 and another sideways movement over a six-month period and either a bottom would be set or there would be another move down to 40. How it will work out we do not know until we get there. When we get where we are gold and silver will be considerably high. It will be interesting to see where interest rates will be. While this is going on they could be lowered somewhat, but our guess is they will try to hold them at this level, although they may have to be increased to break the fall in the dollar to keep it from becoming a rout. It will be a day-to-day event. Do not forget, at least for now, they want to keep the dollar as the world’s reserve currency.
While all this is transpiring commodity prices and prices of gold and silver will rise considerably, the move down for the dollar should take 1-1/2 to 2 years once it begins.
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GOLD, SILVER, PLATINUM, PALADIUM AND DIAMONDS
On Wednesday gold was off $1.60 at 9:30 a.m. EST. The attack began as usual at the NY opening, chasing gold down $3.50 and silver off $0.20 as the euro got hit for .0061 and the pound .0068. More of the same until the Beijing meeting is over. In fact, gold sold down as low as $622.40 and silver slipped to $13.46 interday. Spot gold finished up $0.40 to $627.50 and silver lost $0.8 to $13.72. The February gold contract finished up $0.60 to $632.30, silver $13.91, down $0.08, copper fell $0.06 to $3.04 and the access market in gold was up $0.70. On Tuesday the big Tocom shorts again reduced their shorts by 2,460 contracts to total 124,727. Of those Goldman covered 259 to total 30,359 short contracts. Again this is bullish for gold. The same group reduced their net long positions by 144 contracts to 589 long contracts in silver.
Wednesday was another do-nothing day as our government propped up the market. The Dow rose 2 points to 13,317, the S&P was up 15 Dow points and Nasdaq was up 5 Dow points. Oil rose $0.35 to $61.45, gas rose $0.02 to $1.62 on favorable inventory reports and natural gas rose $0.24 to $7.67 in sympathy. The euro was forced down .0065 to $1.3218, the pound fell .0031 to $1.9673, the Canadian dollar fell again .37 to 86.45 and the dollar index rose .42 to 83.06. The 2-year Treasury yield was 4.71% and the 10-year was 4.58%.
The professional and commercial gold shorts have about the same position they had 2 to 3 weeks ago after having covered 50% to 60% of their shorts. The big change is lease rates shot up .04% on Thursday to .15%, a level it hasn’t seen since mid-October. When the gold will be gone that was leased a couple of weeks ago we do not know, but we are guessing it will be gone by tomorrow. If you were to look at the one-year chart for the one-year gold lease rates you would see every manipulation in the past year immediately was followed by a drastic drop in one-year gold lease rates. We now have a modus operandi.
On Thursday gold and silver had another lackluster day, but we’ll take it. Gold rose $1.40 to $626.10 and silver was up $0.07 to $13.79. The February contract on gold fell $1.50 to $630.90, silver was up $0.04 to $13.95, copper rose $0.03 to $3.06 and the access market was off $0.90. This in spite of the fact that a member of the Swiss National Bank said no more gold sales were planned and that the US dollar content of foreign reserves has been substantially reduced over the past few years. In addition, a former officer of the Iranian Bank Saderat confirmed that Iran has been buying gold for its reserves. The repo market added almost $20 billion to the pool today. OPEC will not meet in January, but they have agreed to cut production by 500,000 barrels a day. Oil closed up $1.14 to $62.51, gas $1.67 up $0.05 and natural gas fell $0.12 to $7.56. The large Tocom shorts on Wednesday added only 317 shorts to total 125,044. Goldman increased shorts by 636 contracts bringing net shorts to 30,967. The big silver shorts cut their net longs by 237 contracts to a total 352. The XAU rose 1.18 to 143.95 and the HUI gained .51 to 143.95.
Thursday the Dow rose 99 to 12,417, S&P was up a Dow equivalent of 111 points and Nasdaq rose 126 Dow points. The euro fell .0069 to $1.3148, the pound fell .0065 to $1.9605, the Canadian dollar fell .04 to 86.41 and the dollar index rose .37 to 83.69. The 2-year Treasury yielded 4.73% and the 10’s ended at 4.60%.
The European Parliament has approved the world’s most stringent law aimed at protecting people and the environment from thousands of toxic chemicals and substances. That is 30,000 toxic substances, 1,500 of which will be banned. The legislation though adamantly opposed by US industry and the Bush administration will be enforced on products entering the EU. This takes effect in June and will be phased in over 11 years. It awaits passage by the European council. We told you this was coming some time ago and the bottom line is silver will have to be used in soldering and in other applications. We do not have the numbers on increased silver usage, but they will be substantial.
On Friday one-year lease rates jumped again by .03% for a total rate of .17%, yet the manipulation continues with gold getting hammered today, as the crescendo of the Chinese “shock and awe” campaign continued. It’s down over 5% in a week or so. And, if you consider that gold would probably be trading at $675 absent manipulation that is a total takedown of more than 8.5% from where it would have been.
Given the recent quadrupling of the one-year lease rate to levels that are the highest in six months, we may have touched a nerve. Their arrogance has led them to create such an obvious pattern, which highlights their manipulations. It is somewhat satisfying that we have made future manipulations more costly, as a result of our exposure of their method of operation.
On the percentage basis silver was hammered. The one-year silver lease rate was over 6% just before the May peak and by June it had dropped to 3%. It was 2% by early July. On November 16th it was 1.5%, and it fell to 1% and did not start back up again until 12/12. That was a 600% drop from top to bottom. As you can see the drop in both gold and silver were planned before the May fall.
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SUBSCRIPTION and RENEWAL INFORMATION: 1-YEAR $129.95 U.S. Funds.
Make check payable to ROBERT CHAPMAN (NOT International Forecaster), and mail to P.O. Box 510518, Punta Gorda, FL 33951-0518. Please include name, address, telephone number and e-mail address. We accept Visa and MasterCard charges. Provide us with your card number and expiration date. We will charge your card US$129.95 for a one-year subscription.
Foreigners please use foreign U.S. dollar denominated checks or Money Orders.
Note: We publish twice a month by surface mail or twice a week by E-mail. international_forecaster@yahoo.com
