MID WEEK ISSUE
WEDNESDAY, FEBRUARY 7, 2007
THE INTERNATIONAL FORECASTER
P. O. Box 510518, Punta Gorda, FL 33951-0518An 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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We believe there is a distinct possibility that a major correction could be beginning in mortgage-backed securities. The BBB sector represents 25% of available credit for home purchases and if the securities were to plunge, funding could dry up and some hedge funds could be in some serious trouble. The implosion could then spread to all sectors of the credit markets.
Sir Alan Greenspan created this subprime monster and he is totally to blame. Whether he was taking orders from elitists higher up is irrelevant. He put this in motion. This may be why George and the neocons are so anxious to start war with Iran by April 1st. The subprime shake out is something we predicted four years ago, when the use of ARMS really got underway. The defaults and foreclosures are well underway and lenders are either going bankrupt or being bought out by elitist firms to contain the visual damage. Goldilocks died in March of 2000, and cannot be resuscitated. The fall of BBB subprime mortgage-backed securities is almost vertical if you look at securities dated during the last half of 2006. This fall is now spreading to A, AA and AAA securities even though they simply happen to be mortgages of better quality.
This BBB problem does not stand alone. If it did it would be difficult and painful, but in today’s world we have to factor in derivatives. These derivatives are insurance and as of late the premiums are very small because nothing negative could possibly happen to our economy. We can assure you as mortgages go bad so will the derivatives writers, because most of them are naked and they do not have the financial assets to withstand the coming subprime storm. Do not forget, derivatives are an unregulated market and only the writers and buyers even have a clue as to what is going on. That entire derivatives market is worth some $380 trillion. That is some time bomb. Banks, insurance companies, brokerage firms, pension funds and hedge funds want to mark their mortgage-backed securities to the market (MBS), so they have purchased derivative insurance. They are called credit default swaps (CDS). US banks have 50% of their assets in real estate related securities – some as high as 70%, like JP Morgan Chase. All these financial entities are on both sides of these transactions, some are buying and selling both MBS and CDS and this incestuous relationship is extremely hazardous. All the players are at risk. If one or just two writers get in trouble it will affect all the players. This may soon be the case in the subprime MBS market and in the swaps end as well. What we have outlined for you here is little understood and unreported in the establishment media and for good reason; they want you kept in the dark. This subprime problem could be the event that begins the unraveling of our financial markets, and it’s very close to imploding.
This problem will be expedited by a slowing economy, which we have now had for a year in spite of the massive amounts of money and credit available. The slowdown is picking up steam and is now becoming more obvious. For the month of January business in lending, real estate, and in the retail auto industry has ground to a halt. Car sales are off 50% in the hot selling luxury car markets and in the non-hot end sales are virtually nil. That is what happens when you spend six years giving cars away. Car dealerships that have been in business since the early 1900s are closing their doors. Real estate sales are a fraction of what they used to be and in the mortgage lending business the bulk of their work is dealing with people trying to get out of interest-only and ARMS mortgages, not new purchases. This has transpired in a northern January that was as warm as springtime. If you ever wanted to sell real estate, do it now and price it right to the market. If you have exotic mortgages, get rid of them. If you have debt, pay it off except for your mortgage. If you have surplus funds, buy gold and silver assets – it is the only safe haven available.
Last week in Davos, Switzerland, at the World Economic Forum, there was only one raging debate and that concerned derivatives. This is unusual because derivatives have had visibility for some 15 years. That means some parties are getting worried about exposure.
The first leg of debate was concerned whether regulators needed to worry about the fact that the structured finance and derivatives world is opaque, particularly given the dominant role of unregulated hedge funds. Of course, regulators need to worry, everyone should worry, derivatives problems could bring down the financial system. Derivatives are unregulated and that is by design. Government, our central bank and the securities industry want it that way and they get whatever they want.
We are told over and over that derivatives disperse risk across the financial system. Yes, in theory, but not in reality. Banks have adroitly dumped risk on to hedge funds and others, but banks are lending to those same hedge funds, so they are reassuming some of the risk they believed they got rid of. That also leads to concentration, not disbursement of risk. Concentration also exists among writers and buyers, which eventually could cause contagion and magnify any crisis. If this happens by the time regulators get around to doing something the damage has already been done. Oversight isn’t good enough, especially when the vehicles trade over a number of different countries. No matter how you look at it derivatives are a major problem and regulation is needed quickly. If we do not have regulation we may end up with no financial system.
The cost of baked goods continues to climb as the price of wheat and corn rises. Part of the problem is the increased diversion of corn for ethanol and hedge fund speculation in the whole grain complex. Prices are rising and we all know that once they rise they almost never fall.
Harley Davidson has locked out employees at its largest plant after workers authorized a strike. The union representing 2,798 workers is fighting a contract proposal that would cut wages for new hires and change health benefits. The union has called the lockout betrayal.
Harley reported net income at a record $1.04 billion, or $3.93 per share for 2006. The union president says Harley has no business behaving like they’re on the brink of bankruptcy. The company’s management is risking a successful 26-year partnership for a few cents more in profits. It is incredibly stupid. We agree, but this is the mindset of corporate America today. Perhaps management wants to ship the plants to China and produce there. Then everyone can ride rice burners.
Investors are accusing Dell of an accounting kickback scheme involving chipmaker Intel Corp. Dell is being paid $1 billion annually by Intel, to assure Dell uses only Intel chips in its computers. Another suit is pending for inflating financial results, including misstating the reserves. The SEC and the Justice Department have now begun investigating.
The only thing really holding the economy together is the enormous faith in the ability of the Fed to keep the bubble inflated. What professionals and the public do not understand is that much of the debt accrued at all levels can never be paid back. The question is has this faith been well placed and can the Fed keep the bubble expanded with no negative consequences? Bubbles of this type end when the Fed is no longer willing or able to provide further credit on when consumers or businesses are no longer willing to borrow. Consumers are beginning to fade and that will continue. The real question is when will business fade? Even if consumers slow their consumption and borrow less, businesses still have to break. We believe the consumer will falter and that will finally stop business and deflation will follow.
Foreclosures are dreadful. We have gone into recent problems quite extensively, but want to bring into focus the problems of the main hot market, California. It has been the last of the hot 30 markets to show signs of breaking. This is the key market. Once California goes, the rest of the markets will follow. Foreclosures increased 94% last year to 157,417 homes. This may be the most foreclosures, but Nevada had the highest percentage increase at 175%. Nationwide there were 971,000 a yoy increase of 51%.
The Fed has the money and credit spigots wide open. Yes, they can increase the velocity, but will creditors keep on buying in a bigger way? We do not know about the short term, but we know on the long term they cannot. This past week money and credit fell almost $9 billion. Is this the reversal? We do not know, we need a few months to find out. One week doesn’t make a trend. We do know the consumer is cutting back, particularly in durables. We believe accommodation will continue at least for the short to intermediate term, because with the cut back on money and credit the bottom falls out, but the dollar index stays above 80. If they increase money and credit and lower interest rates, the dollar collapses. In just the last two months, 12 mortgage lenders have gone under. They are increasing at six a month. These lenders are among the top 20 subprime lenders. In a few months there may be no subprime lenders left. Who is going to shoulder all those bad loans? We’ll tell you in the next episode.
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GOLD, SILVER, PLATINUM, PALADIUM AND DIAMONDS
Since August, Russia has been increasing its gold reserves says the IMF. President Putin has implied that he wants 10% of reserves in gold. This means the pace of purchases will have to increase dramatically.
We have just seen for the second time a European central bank purchase large amounts of gold coins in the market, yet selling authorized by the Central Bank Gold Agreement, has dwindled to 25% of what can be sold. They could be saving saleable gold for later for higher prices or to manipulate prices at more important levels, but we believe they do not want to sell much more, have little to sell or nothing to sell because it is all leased out. The US can be in no better shape having swapped coin melt with the Germans so good delivery could be affected. All central banks are doing some diversification out of the dollar and some are buying gold as well as other currencies. If we were finance ministers all we’d want is gold, not other fiat paper.
A battle is raging between the gold suppression cartel and the physical gold bullion buyers. The elitists want to break gold back down below $640.00 and the bulls want gold to break out over $660.00 for its next big move. We’ll win, but it won’t be easy - although we may be helped out by evolving events, such as war with Iran or a collapse in the subprime mortgage market. IMF sales are inconsequential if they ever happen. That latest announcement was only disinformation to assist the gold suppression cartel. We suggest the IMF might contemplate cutting costs and rearranging their budget. Those gold reserve commitments by central bank members should be viewed as an insurance policy against global fiscal crisis, not a piggybank to be opened every time the IMF wants to fund something.
Gold production continues to fall in South Africa and now in Peru. That will continue for several more years. All indications are that the shortfall to consumption will persist for several more years. Gold is headed higher no matter what the elitists do, so hold on for the ride of a lifetime.
In the last issue we pointed out that the commercial gold traders were shorting heavily in order to impede the upward progress of gold. Gold isn’t about to plunge – they just don’t want it going higher. Someone might get the idea that there are problems in the world economy. At the same time the gold ETF buyers are loading up.
The commercials have added almost 50,000 short contracts over the past three weeks net 25, 6 and 17 or an actual total of 48,000. That is an increase in less than one month was 53,937 contracts. This has happened as gold rose $33.00, which certainly was not encouraging for the commercials. Some believe the commercial shorts believe something bearish is going to affect the gold market. We think just the opposite. We believe the commercials are being driven by elitist forces that want to hold gold back because something very bad is going to happen. This is borne out by the wider spectrum physical gold buyers that inhabit the ETFS. They continue to buy, 1.54 tons the week before last and 8.33 tons last week. Barclay’s was unchanged, but the UK Lyxor Gold Bullion Securities rose 0.61 tons. We’ll bet on the physical buyers.
In silver Barclay’s IShares Silver Trust jumped 108.5 tons at a cost of $1.63 billion.
The bottom line is the commercials are not always right and when they are wrong they are very wrong.
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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
