MID-WEEK JANUARY 3, 2007

THE INTERNATIONAL FORECASTER

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 recovery in real estate from 2001 through 2005 didn’t happen by chance. It wasn’t part of a recovery cycle. It was planned and executed by the Federal Reserve. The result was predictable and easy to understand. The Fed lowered interest rates to the lowest level since the 1930s, and allowed people to buy homes who were totally unqualified. This injection of the unqualified into the system forced prices to unsustainable heights. This housing boom manufactured at the Federal Reserve allowed homeowners to borrow against their newly created equity allowing the boom to feed on itself and to keep the economy afloat. There was nothing typical about this recovery. It was fed by the lowest interest rates in 75 years, rates only seen during the Great Depression.

Wages during this timeframe fell so low loan interest rates and the spending of home equity enabled the enormous consumer spending that not only kept the economy from collapsing, but also created many new jobs in the construction and real estate industry. In fact the sector created 50% of the growth in the economy.

In June 2005, the residential real estate market peaked. The great enabling tool of the Fed had reached exhaustion. The primary driver of the post crash economy had served its purpose and was beginning its decline that was to present a new set of problems. As we have seen over the past 1-1/2 years residential real estate prices have fallen 5% to 20% in some of the 30 former hot markets. Inventory for sale is 6.7-months in new homes and 7.2-months in existing homes. Over the past six months the construction and real estate industry has been laying off workers for lack of business and that should continue for the next two to three years. Homes that are selling have lower prices or have been discounted in a number of novel ways to protect or manipulate prices. These practices unfortunately are defrauding lenders, who under pressure from our government are accepting bogus home appraisal vales. In turn the market will sort that out and the inevitable fall in prices will take place. As prices fall so will economic activity. The Fed created the biggest housing boom in history and now they have to deal with its aftermath, which will include a real estate bust that will affect the entire economy, including the equities’ market. In the meantime in order to avoid these unappetizing events the Fed, for the last three years, has created massive amounts of credit that has given us more than 10% inflation, which, of course, our government denies and lies to us about.

Most investors and the public do not realize it but the stock market collapse of 2000-2002 was just as bad as that of 1929-1931. Stocks fell from 30-80 percent depending on their speculative qualities. We might add here that the IF got its subscribers out of the market in the first week of April 2000. We were part of only 1-1/2% of all analysts, economists and newsletters who proved to be correct, calling the top of the market. As it turns out in June 2005 we were correct in calling the top of the real estate market as well. What has been unique in the years since 2001 is that due to prohibitively low interest rates, the consumer has kept right on spending like nothing ever happened due to low interest rates and home equity withdrawals. At the same time there was record government deficit spending and massive tax cuts, particularly for the rich. That was accompanied by massive military spending for two simultaneous wars and occupations. We forecast these actions two years before they occurred.

Had the Fed allowed the economy to be purged via recession in the early 1990s, we would have never had the stock market collapse of 2000 and 2001 and the real estate collapse of 2005-2009. Now we are also facing a credit collapse that should hit once the stock market heads down again. Once the demand for excessive credit ceases that will signal the bursting of a third bubble, all occurring within ten years. The segment to be hit hard during the coming credit collapse will be the financial and services industries. The Fed believes, or would have you believe, that deflation and depression can be avoided by continually increasing money and credit. Not in their wildest dreams. At some point the desire to borrow by business and financial sources will end or there will be some unexpected event, such as a derivatives failure or a hedge fund collapse and the ability to employ this credit will end. When that occurs you will have six months to a year to exit “all” investments except gold bullion coins. While all the foregoing is taking place inflation will rage and gold and silver will rise in spectacular fashion. The fed may be able to print endless supplies of money and credit, but people have to be induced to spend and borrow.

Today relatively low interest rates and the low cost of capital still encourages economic activity. Unfortunately it is called financial speculation and the credit it uses causes inflation. For four years the only non-inflationary sector of the economy has been workers wages and in the past year they are only up 4.1%. They have a long way to go to catch up with their productivity gains and to offset real inflation. This lack of wage increases and the fall in housing prices, which has cut back on equity value, has not only reduced home sales by some 50%, but it has caused a cutback in the purchase of vehicles, appliances, computers and other large items like furniture. While this transpires keep in mind the American consumer is buried in debt and has no savings.

It was great going up but it will be painful going down. We have had a one trick pony for recovery-real estate. That is not a well-rounded recovery. Job creation was centered in real estate, appraisal, lending and construction and for the past six months unemployment has risen in these sectors and will continue to for the next few years. Don’t forget these were for the most part high paying or decent paying jobs. Their loss will have a significant affect on the economy. There was nothing normal about the real estate boom and there will be nothing normal about its reversal. Worse the psychology has been broken and the speculation is gone. Even if interest rates were lowered there would be no upside to the housing-construction complex. Prices won’t hold with lower rates. There is too much inventory and lenders have had to tighten up on borrowing requirements. Lenders are starting to get loans back that have turned quickly into foreclosures. The hoard of unemployed workers from the complex is going to put downward pressure on wages and salaries in other sectors, not to mention the unemployed illegal aliens, and offshoring and outsourcing. Even more distressing is that after the previous nine recessions there were an average of 11.9% more jobs in the economy than there had been at the end of the recession. New job creation during this recovery has been the worst since World War II and 70% of the jobs created were low paying service jobs.

We are now facing three more years of new mortgage creation to accommodate adjustable rate mortgages whose terms have expired. That is $2.5 trillion in expiring ARMS over the next two years that will substantially increase house payment if the mortgage holder still has equity left in the home. Over the boom this risky form of financing was used because 50% of homebuyers were unqualified. They are known as subprime borrowers. They have been defaulting over the past year and their defaults will escalate over the two to three years ahead. Again the Fed created this monster just as they created the dotcom boom. A boom that saw about half the jobs created over that period being in just one sector real estate. As a result over the past year real estate and construction job creation fell almost 70%. The gains or a good part of the gains in real estate will soon be lost. A house is a place to live, not a speculative vehicle. It is abnormal that the rise in home prices should provide for 70% of the increase in household net worth since 2001. That wealth affect is gone and that is extremely important to the economy. The affect of the coming housing plunge will be double the negative affect of the fall in the stock market in 2000-2001. Almost 69% of Americans own homes – some 45% to 50% own stocks. Thus, you can expect quite a fallout and severe recession as homeowners are ill prepared for it being so deeply in debt.

That means consumer spending that currently is 70% of GDP will fall at least back to the long term mean of 64.5%. Real unemployment is more than 13%, we see that at 25% to 35% dependent on how bad things get, unless, of course, we have another war. We believe 30% to 35% of Americans could lose their homes. Remember, had it not been for mortgage equity withdrawals we long ago would have had a GDP growth rate of zero and been already deeply into recession. In 2004 and 2005 it averaged 8% of disposable income, which is a super fantastic increase. Put another way it was responsible for 75% of GDP growth. Being that we are already deeply into a credit bubble we ask where will the next bubble come from? We don’t know, but investors will look to something that hasn’t really appreciated. The only thing that comes to mind is the remainder of the bull markets in gold, silver and commodities. We see higher interest rates to attract funds to dollar assets so that the dollar falls in a managed, orderly manner. Those higher rates will expedite the downside in real estate and choke off mortgage equity withdrawals.

The affect of higher rates or at best unchanged interest rates will allow the real estate market to fall lower and for MEW to be substantially reduced The affect of this will ripple throughout the entire economy. There is no question now that we entered recession last February and finally some of the experts are catching on. We have already cut taxes so all we can do now is increase them to keep government going, but that creates an additional drag on the economy. If you want to lay blame for what has happened and what is ahead just look, at what the Fed and the Bush administration has done. They are both in a box and they cannot get out. We are headed for very troubled times. Make sure you have gold and silver related assets and prepare for a long siege of trouble.

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GOLD, SILVER, PLATINUM, PALADIUM AND DIAMONDS

It was a great year for gold and silver related assets. Gold rose 23% and silver was up 45.5% in 2006. That is in spite of our government and central banks doing everything possible to suppress their prices.

The Shanghai Gold Exchange has started trading in 100-gram gold bars, which will make gold more available to small private investors. This is the year of the PIG and it coincides with a metals year of good fortune to the Chinese and 2007 coincides with a metals year on the 5-year elemental cycle tying in with five other planets, and the metal associated with this is gold. This should make the Chinese big gold buyers this year. A week dollar has prompted more gold interest. In 2006 savings grew 17.1% in China and the purchase of gold grew 17%. Incidentally gold consumption in the US fell 10%.

There is an excellent possibility that China-US relations will deteriorate in 2007 and there could be trade tariff legislation, especially after that stupid trip Paulson and Bernanke took in December and came home, as we predicted, empty handed. The outlook for the dollar is worsening. That means China will sell dollars and China and the Chinese will buy gold.

Gold production peaked at 2,500 tons in 2003 and it has been in decline ever since. We believe that the official inventories of gold are not 32,000 tons. They are probably 5,000 tons. The BIS says gold derivatives rose from $334 billion at the end of 2005 to $456 billion in June 2006, as gold rose from $513 to $614. Total gold derivatives rose 2,800 tons, options rose 3,000 tons and forwards and swaps fell 200 tons Viewed in relative tonnages derivatives are substantial. They are nearly 30,000 tons of gold, close to the total claimed official gold reserves. The increase of 3,000 tons over the first half of 2006 was more than twice new mine production.

The next two years will be absolutely giant for gold. You will make money you never dreamed of making. This is what betting parlance calls the lock – the-can’t-lose bet. The two biggest recipients will be gold and silver shares and numismatic coins, following by silver numismatics, and gold and silver bullion and bullion coins. Share multiples will go ballistic - $850 and $25 will be broken in 2007 and we may well see $1,700 and $100.

The big physical buyers will buy even more: India, China and the Middle East. All those under 50 years old will finally discover the significance gold and silver and their relevance to inflation and to the deflation flight to quality. Canada, the US and Europe will finally get involved in gold and silver related assets.

The dollar will break .80 and 78.33, and move to .70 to .72 in 2007. As tariffs are put in place China will dump more dollars as will others and China will become more belligerent to the US. The American economy will be mired in recession as our budget deficit and our current account deficits go berserk. Interest rates will rise and real estate will fall further. NATO will pull out of Afghanistan and the US will lay plans to leave Iraq as war spending heads to $1 trillion. The Fed will pour more money and credit into the economy inundating the world with dollars. These insane imbeciles in Washington may even engage us in war in South America.

We see as an excellent possibility that George W. Bush will be assassinated by the Illuminati. Loose cannons who do not do as they are told are liquidated. He is doing the exact opposite of what he was told to do. This is the desperate times and people throughout the world are going to take terrible financial losses, especially Americans.

We have been publishing the International Forecaster for 17 years after having spent 28 years in finance and economics, specializing in gold and silver stocks. We have by far been more correct about events than any other publication. We are the only publication that answers all questions by mail, e-mail or telephone immediately for free. We have been correct 98% of the time. Get others to subscribe because they will truly need us over the next three years.

Kyrgyzstan’s gold production fell 35.9% YOY in the January-November timeframe to 9.048 tons or 17.9% less then planned.

In 1999, Gordon Brown, Chancellor of the Exchequer, sold 60% of England’s gold reserves in 17 auctions that stretched from July 1999 to March 2002. The result has been catastrophic for the public purse and all Englishmen. It is inconceivable Brown is in line for Tony Blair’s job as P.M. He signaled every auction that drove the price down in front of every auction. The first sale was at $254, the bottom of the gold market. Over the following three years, 395 tons were sold at an average price of $274.9 an ounce, a monument to Brown’s stupidity. The gold sales raised $3.85 billion. Today it is worth $8.78 billion, a loss of $4.95 billion. Even with having invested the funds in other currencies it is estimated that Britain lost at least $2 billion. Gold is headed to a minimum of $1,700 an ounce. That will be a giant loss.

On Tuesday gold moved up $4.10 to $640 an ounce on the revelation that a member bank of the European Central Bank system had been buying gold bullion. These 12 banks have been sellers for a number of years in an effort to suppress gold prices.

Some believe the Bank of Italy could have been the buyer because Italy had not been a gold seller previously. It switched 20% of reserves into sterling in 2005. It could be that Italy is building gold reserves in anticipation of leaving the euro. Be as it may it is a crack in the central bank defenses.

As you know countries holding large dollar reserves are dumping the dollar in favor of the euro. Recently it has been the UAE, Russia, Switzerland and Venezuela, along with Iran. China has been a seller as well. As we have said the euro is not the answer, it’s a little better than the dollar. Gold is really the answer. We see the euro at $1.44 minimum in 2007.

There is discontent with the euro as voiced by France, Germany and Holland. The higher euro is going to make the Eurozone less competitive in the export market. The problems at Airbus are a good example.

There are reports of Germany and France printing up francs and marks just in case the euro is abandoned. This is very important because if the euro goes down the Amero doesn’t stand a chance of adoption and those events would at least for the time being destroy the Illuminati drive toward a world currency. As we have said for some time one interest rate cannot fit all and there are rules that allow nations to reassert their own monetary policy. Do not forget the EU Constitution was not ratified and won’t be in the future. They did everything backwards in their pompous, arrogant greed. In addition, Germany’s balance of payments surplus is being used to carry the other 12 member’s deficits and that cannot continue indefinitely.

In the year ended October, France had a 14% drop in auto production, which is very bad. They want lower not higher interest rates to keep from going into recession. They are also very upset with the euro’s 11% rise versus the dollar and other currencies, plus 20% versus the yen. All of Europe, like the US and Canada, are struggling against exporters who are all rigging their currencies. As you can see the euro is not the alternative. Local currencies will help but gold is the answer and obviously Italy has heard its call.

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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

-- Posted Wednesday, 3 January 2007 | Digg This Article