SATURDAY, JUNE 23, 2007
THE INTERNATIONAL FORECASTER
06_07_4_IF
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
Someone turned the light on and as a result the Chairman of the Fed, Ben Bernanke said changes in house prices could have a bigger affect on consumption than the traditional “wealth effect” suggests.
The Fed is telling us we are in a recession and that there will be continuing problems in the housing industry. The Fed has discovered that changes in house prices might influence the cost and availability of credit to consumers. Mr. Ben admits that “changes in home values may affect household borrowing and spending somewhat more than suggested by the conventional wealth effect.” He was particularly concerned about price falls in areas where people have little home equity. This is typically with a high proportion of subprime loans.
Mr. Bernanke says in areas of fixed rate mortgages, the effect of home price changes on access to credit overall may be muted. We have never seen so many mays, coulds or woulds. Couching tells us that Ben and the Fed know what is going to happen, but they are not about to tell you the truth about the situation. Remember, this is the same Fed that encouraged everyone to get an adjustable rate mortgage.
Now for the classic: Mr. Bernanke said he did not know whether the so-called “financial accelerator effect on household spending via access to credit was big enough to affect the overall economy.” Of course he knows. Any college freshman knows. If equity is falling and interest rates are rising and lending standards are tightened less equity and cash out loans will be made. Those loans have already fallen more than 50% over the last 1-1/2 years, and that means some $300 billion is no longer available to fuel the economy. This is the money the public used over the past four years to continue their lifestyles and spending sprees, because their wages and salaries did not come anywhere near covering the increases in inflation, which our government tells us is 2.4%. As a result of free trade, globalization, offshoring and outsourcing have produced productivity gains of only 0.6%, while higher interest rates erode and reduce the value of personal and corporate assets and cash flows. Ben gets it, he just doesn’t want you to know the economy is in serious trouble and it is going to get much worse.
It has been six months since subprime and ALT-A lenders started to go bankrupt. At last count 82 had gone out of business. As a result tremors are stressing Wall Street, as investment funds that bought a stake in those loans are starting to wobble. The next 82 to bite the dust over the next two years will further constrict consumers with weak, subprime, ALT-A’s and those who have lost their jobs due to what has been done to our economy by transnational conglomerates, will have a difficult time ahead. The housing debacle is not going to end soon. It will be very prolonged. After inventory and prices finally achieve their full correction there will be a long period of large inventory and stagnant prices hindered mainly by higher interest rates.
The end of the housing bubble will force banks, hedge funds and pension plans to acknowledge substantial losses that have been hidden away in complex investment vehicles that only have a real value when they are liquidated. These events will be another factor that will limit the money available for mortgage lending.
The investment banks, such as Bear Stearns, which was a dominant player in the mortgage arena, is fighting for survival as they scramble to come up with more capital. $500 million is not chump change. We also see some big participants with big losses bailing out. Last week Barclays sold $3.6 billion in high-grade securities backed by subprime mortgages. The question is how can subprime CDOs be high grade? The question is will Bear Stearns’ fund collapse? If they do we are afraid others will follow.
Bear Sterns fund, High-Grade Structured Credit Strategies Enhanced Leverage Fund, fell 23% in value through April and it only started 10 months ago with $600 million, but it borrowed $6 billion. In May, the investors were frozen as the fund stopped redemptions. Normally the housing market would move slowly, but when you are leveraged 10 to 1 momentum quickly gains speed. Many investment managers just looked at the ratings and bought. The problem is the ratings were not correct. As the housing slump becomes a bust many more funds will take heavy losses and some will go under. That will have a serious affect on the use of leverage and future risk that will cause a pullback in borrowing as interest rates move higher. That, in 2 to 3 years, will eventually bring on deflation no matter how much liquidity is made available.
Sovereign wealth funds are fast becoming the new masters of global finance. We are told these entities will grow to $27.7 trillion by 2022 from about $2.5 trillion today. They could well become agents of evil in their quest to dump dollars by threatening to usurp other countries’ patrimonies by gobbling up strategic industries, imposing alien cultures and possibly igniting a cycle of financial protectionism that will harm the world economy. The US can ill afford the prospect of foreign interests moving in on important commodity and energy sources. You can easily envision a scenario where large sovereign funds legitimately take controlling interest of, say, a major oil producer or even a state-owned entity. We could see the intriguing spectacle of its largest private companies being owned by other governments whose belief in capitalism is often partial or transitory.
“No Child Left Behind” is another failed social experiment, which has actually left our brightest children behind. Above average children are not reaching their full potential. These are the kids who no longer matter to the elitists because they are achieving the minimal level that NCLB is striving for - teaching to the lowest common denominator. Those who achieve above standard get no help at all and the dumb get tutors. This is why our nation is falling so far behind.
A bill by Sen. Deane Feinstein (D-CA) would require cars and light trucks to get 35 MPG, up from 27.5 MPG for cars and 21.6 MPG for trucks. GM said that would add $7,000 to the cost of each vehicle.
The ABX derivatives index dropped to a record low on Wednesday because of continuing concerns about a hedge fund facing potential losses from its holdings of risky subprime mortgages. The ABX 2007-1 “BBB- Minus Index” that references home loans made to risky borrowers in the second half of last year, dropped to 59.25 compared to 60.39 on Tuesday.
Wal-Mart is selling prepaid Visa Debit Cards that do not require a credit check or bank account. They already do payroll check cashing and money transfers, so this card is geared for illegal aliens. Money centers will rise from 225 to 1,000 this year. Wal-Mart’s partner is GE.
Mortgage application volume fell 3.4% last week; apps were up 13.2% compared to the same week in 2006. The four-week average was down 1.6%. Purchase applications fell 3% and ref apps were off 4.2%. The refi share of the market was 38%, while ARMs increased to 20.3% from 18.7%. The 30-year fixed rate mortgage was 6.60%, down from 6.61%. The 15’s were 6.28% and the one-year ARM was 5.70%, up from 5.48%.
Merrill Lynch has seized about $800 million of assets from troubled hedge funds managed by Bear Stearns, throwing in doubt the chances that the funds will survive.
The assets, which were collateral for loans made by Merrill Lynch to the two funds, are mainly bonds backed by other securities that are now expected to be sold off.
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GOLD, SILVER, PATINUM, PALADIUM AND URANIUM
Wednesday, the 20th, was strong to mixed early on, and the Dow was up 37, S&P up 34, Nasdaq up 36, FTSE up 50 Dow points and the CAC was +43 and the DAX +78. The yen was -14, the euro +.0008 and the pound +.0051. The 2-year was 4.94% and the 10’s 5.07%. Oil was -$0.37, gas -$0.02 and natural gas +$0.03. Gold was -$0.30, silver +$0.03 and copper +$0.04.
On Wednesday, the losses wiped out Tuesday’s gains in gold and silver. Gold fell $4.40 to $656.10 and silver slipped $0.06 to $13.21. The August gold contract fell $4.70 to $660.00; silver fell $0.07 and copper rose $0.04 to $13.25. The cartel did its thing to spread confusion, hoping they could run people out of the gold market. They will fail – we just have to be patient. If it’s any consolation, the dollar remains under pressure. The yen was -25 to $123.60, the euro fell -.0016 to $1.3408, the pound rose .0066 to $1.9939, the Canadian dollar fell .36 to 93.70 and the dollar index fell .04 to 82.27. Just three days ago it was over 83. Gold open interest fell 2,486 contracts to 410,324 and silver OI fell 538 to 124,252. On Tuesday the big Tocom shorts reduced their net short position by 1,941 to 130,671 contracts as Goldman increased their net shorts to 487 to 22,801. The same group cut their silver shorts by 355 to 3,849.
The slime that manages the HUI took FCX out of the index and substituted Barrick, which is still heavily hedged in an index of un-hedged gold stocks. This is the hand of the US government, we can promise you. We fought with these people 8 years ago to get them to put GG and AEM in the HUI and they thought they were doing us a favor. The XAU was off 2.78 to 138.44 and the HUI fell 5.77 to 335.20.
The Wednesday Dow fell 146 to 13,489; S&P fell 182 and Nasdaq fell 161 Dow points. The 2-year was 4.98% and the 10’s were 5.14%. Oil fell $0.91 to $68.19 on a DOE mega inventory report, which we suspect was bogus. The API report was up only 465,000 barrels, not over 6 million. Gas fell $0.01 to $2.23 and natural gas fell $0.13 to $7.39.
Early Thursday was not very good. The Dow was unchanged as was S&P and Nasdaq. FTSE was off 90 Dow points. The CAC was -58, and the DAX -103. The yen was -.11, the euro -.0020 and the pound -.00018. The 2-year was 4.98% and the 10’s were 5.17%. Oil was up $0.63, gas was +$0.02 and natural gas was +$0.04. Gold was -$4.00, silver -$0.09 and copper-$0.03.
Russia is 12th on the list of countries with the biggest gold reserves with 301.7 tons, which is 0.27% higher than in March 2007.
The proportion of gold in the overall gold and foreign currency reserves decreased from 2.8% in March to 2.4% in June. The following figures are bogus as reported by the World Gold Council. USA 8,133.5 tons, Germany with 3,4422.5 tons, the IMF 3,217.3 tons, France 2,680.6 tons and Italy 2,451.8 tons.
Early on we were off $4.00 and we stayed down all day Thursday with gold falling $5.50 to $650.60 and silver losing $0.16 to $13.05. The August gold contract fell $5.80 to $654.20, silver lost $0.16 to $13.09 and copper was -$0.04 to $3.40. We see gold and silver being softened up this week because next week will be a very slow week. Silver went below $13.00 and hustled right back. The shorts in gold covered toward the end bring gold back to where it closed. This is a tight market. Gold open interest rose 412 contracts, silver OI rose 5 contracts to 124,257. We are still seeing an era of cheap gold and silver and it won’t last too much longer. Physical demand under $650 and under $13 silver is remarkable. Incidentally the cartel took gold down $5.00 after the N.Y. closes so we knew early on they desired a down day. The central banks were behind this attack. We see a financial system under stress: a struggling dollar, mega-inflation, cutbacks in the purchase of central bank US Treasury purchases, particularly from China, the Bear Stearns fiasco and the failure of an insurance company, all very positive for gold. The big Tocom shorts on Wednesday reduced their gold shorts by a large 4,419 contracts to 126,252 as Goldman covered 612 to net 22,1889. The same group reduced its silver by 62 contracts to 3,786. Gold and silver may have finished off, but the XAU rose 1.12 to 139.66 and the HUI gained 1.49 to 336.69. This is bullish and this again is why you can throw technicals out the window. These two markets are an art form that can only be handled with years of experience.
Thursday’s Dow rose 56, S&P 84 and Nasdaq 102 Dow points. The yen fell .17 to $1.2371, the euro was -.0007 at $1.3387 and the pound was up .0034 at $1.9925. The Canadian dollar up .03 to 93.08 and the dollar index rose .21 to 82.48. The 2-year Treasury bill was 4.98% and the 10’s were 5.19%. Oil was off $0.21 to $65.68, the gas price was $2.25 and natural gas was -$0.04 to $7.35. The dollar index rose $0.21 to $82.48.
Two very odd things happened today. First, the USDX lost a whopping .405 to end at 82.326 based on a basket of six major currencies, but gold after being up by about 6, from 650 to 656, pulled back about 3 to 653 toward the end of the session, with only one central bank sale of any significance registering in today's action. This was a very modest gain under the circumstances. Hardly what one would expect when the Canadian dollar, euro and pound are pounding (forgive the pun) the dollar so sharply, and with the yen weakening only slightly. On top of this, oil was up .49 to 69.14, and long-term treasury bond rates moderated only very slightly to Wednesday's levels, with the tens at 5.14 and the thirties at 5.25, the thirty year rates being the same as the Fed funds rate. Neither of these developments is even remotely gold negative and both should have been gold positive, along with a host of other factors.
Second, the number of yen to one euro set yet another all-time high today of 166.752. The euro strengthened against the dollar and the yen weakened slightly against the dollar, increasing the spread between the euro and the yen versus the dollar. The yen broke above 124 yen per dollar today, going to 124.13 before settling at 123.88, a level which is almost unheard of. Under such circumstances, the stock markets have spiked upwards in most cases, as these movements are very carry trade friendly for European and US investors alike. Yet the Dow plummeted 185 points today. Not what you would expect when the difference between Friday, with a big loss, and Thursday with a modest gain, in terms of economic news was not a whole lot different. Wednesday also was a big loser for the Dow despite exchange rates equally friendly to carry traders.
This all seems rather confusing at first. But what is really happening here, when you think about it in terms of what the cartel's objectives are, is really quite obvious. And these two oddities are interconnected.
First, notice that on Tuesday of this week, gold made a huge jump from about 654 to almost 662. The cartel thought they had gold under control for the summer, so this sudden increase must have shocked and scared them substantially.
And on top of this, the cartel has some big problems developing. The stock markets and the dollar are in big trouble due to both rising bond rates and mounting evidence that the real estate market has barely even started its decline and has a lot further to go before it reaches a bottom, a bottom which could best be described as a bottomless pit. The determination of long term bond rates, and hence mortgage rates, is now being determined by world markets and large foreign treasury holders. The Fed is now completely irrelevant and powerless when it comes to determining long-term bond rates. In addition, the Bear, Stearns hedge fund subprime mortgage-backed securities debacle is really starting to scare traders, and who knows when and where the next victim will show up, as "the Ripper" in the form of mortgage defaults and chain reaction derivatives failure stalks unsuspecting hedge funds around the world.
Then there is the extremely elevated PPI at .9 % for May of this year. The core PPI is irrelevant because rising food and energy costs will be distributed across the board, either by elevating both the CPI and core CPI as the higher costs are passed on to consumers, or by drastically reducing corporate profits if the costs are eaten by producers. Either way a disaster is looming in the not too distant future. And with all these developments, who on earth wants to continue to fund our trade deficits by purchasing US treasuries, knowing that dollars are worth little more than monopoly money. Due to the lack of interest in acquiring new treasury bonds, the Fed will have to start monetizing outstanding treasury bonds to fund growing trade deficits, which will lead to hyperinflation and an intensification of stagflation as the death spiral of the real estate market drags the economy into financial oblivion.
The downward pressure on the stock market is now so great that the PPT alone can no longer hold it up. The PPT must constantly enlist the help of carry trading hedge funds to support the stock markets by creating conditions favorable to the liquidity of carry traders, such as an astoundingly weak yen, which has set all-time highs for weakness against the euro this week.
Bearing the above in mind, we can now see what has happened in the days following gold's rocket ride on Tuesday.
On Wednesday, the PPT once again used a declining stock market to put a hit on gold. Only one central bank sale of any significance showed in the charts on Wednesday. The yen was kept very weak against both the dollar and the euro to keep carry traders in the market so it would not go into free fall and the PPT substantially withdrew its support of the stock markets to cause margin calls and ensuing gold liquidations to cover. They also sent a message to carry traders: 'Use the liquidity we are giving you to buy stocks instead of gold or you will be punished.'
On Thursday, the PPT stepped back in to avoid market panic, which had already begun earlier in the day, taking the Dow from a 90 point loser to a 56 point winner. To keep pressure on gold Thursday while it was supporting the stock markets, several central bank sales registered on the charts (they take the form of precipitous drops on the charts, as opposed to choppy oblique lines that are created by naked shorting and general liquidations to cover losing stock positions).
On Friday, despite the cartel's best efforts on Wednesday and Thursday to suppress gold prices, gold was rising nicely again early on, shooting from 651 to 656 from the middle of the London session to the beginning of the New York session. So the cartel, which is clearly running out of gold, both in terms of actual physical gold and in terms of cartel members willing to sell any more of their gold, the Swiss National Bank being the latest victim of this shortage, decided to hit the stock markets again by withdrawing the support of the PPT, thereby also hitting the gold market by way of gold liquidations to cover margin calls. Just like on Wednesday, Friday saw only one central bank sale of any significance, as the declining stock markets took care of the rest.
You might also note that the current hit on gold described above is reminiscent of the first full business week of this month where the yen per euro rate of exchange reached on all time high (up to that point in time) of 164.61 on June 5, 2007, which was the day after the Dow hit its all time high of 13,676.32 on June 4 before starting its gold-bashing plummet over the subsequent next several days. Like the current crash, the early June crash was controlled with the help of the PPT and the weak yen so it did not get out of hand, while gold was diabolically suppressed once again after spiking up to 674 on June 4. Much of the liquidity provided by the weak yen was being pumped into gold, and the large spec hedge fund carry traders were thoroughly punished with a devastating 409.59 drop in the Dow over the ensuing three days.
The current conditions and the manipulations described above are the end product of all the machinations and nefarious activities of the cartel over many decades. This has been a planned and orchestrated descent into financial oblivion to destroy the prosperity and sovereignty of the US and to create a corporatist, fascist one-world government, where the "Lords of the Universe" will lord it over their gruel-swilling serfs. Remember to show your appreciation to these megalomaniacal whackos after they take us down. The final destruction is coming soon to a theatre near you, so be ready for it, and buy gold, silver and their related stocks like they were your last hope, because they are.
The cartel was unsuccessful in driving gold down on Friday, although they did their best. Gold finished up $3.00 at $653.60, as silver fell $0.02 to $13.03. The August gold rose $2.80 to $657.00 silver fell $0.07 to $13.02 and copper fell $0.02 to $3.38. The dollar was bombed. The yen fell .04 to $1.2376, the euro rose .0075 to $1.3463, the pound rose .0064 to $1.9989, the Canadian dollar rose .44 to 93.99 and the USDX dollar index fell .-40 to 82.10. Gold should have been up $10.00. The Dow tanked to 13,360, -185, S&P -177 and Nasdaq -168 Dow points. Oil was up again $0.49 to $69.14, gas up $0.04 to $2.29 and natural gas off $0.22 to $7.13. The 2-year Treasury yielded 4.91% and the 10’s were 5.14%. Gold open interest rose a large 5,879 contracts to 416,615, which was new selling by the cartel. Silver open interest fell 278 contracts to 123,979. In the COT report the specs increased longs by 1,131 and reduced shorts by 4,578 to be a net long of 5,709 contracts. The commercials reduced longs 6,591 and increased shorts 4,624 to go 11,219 short just as we suspected they had. We also believe they added to shorts again this week. We believe the strong dollar policy of the elitists isn’t working and the dollar will continue to weaken, interest rates will move higher with gold and silver and the stock market will fall. The big Tocom shorts reduced their net shorts by 1,218 contracts to 125,034, as Goldman increased their shorts by 74 contracts to 22,263. The same crew reduced their net silver shorts by 11 to 3,775 contracts. The XAU lost 1.22 to 138.74 and the HUI dipped .63 to 335.05.
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