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International Forecaster February 2010 (#1) - Gold, Silver, Economy + More

By: Bob Chapman, The International Forecaster

-- Posted Wednesday, 3 February 2010 | | Source:

The following are some snippets from the most recent issue of the International Forecaster.  For the full 19 page issue, please see subscription information below.



          The recent election in Massachusetts of Republican Scott Brown to the Senate was a seminal event. It ended the Democratic administration’s ability to ram through legislation. It changed the game. The locomotive hit the bunter.


          China saw the error of its ways in over stimulating its economy and halted bank lending. The Senate majority refusing to seat the new Senator Brown passed a tremendous increase in short-term government debt. Goldman Sachs and others thumbed their noses at the rest of America and distributed giant bonuses as the country wallowed in depression and 22.5% unemployment. Finally we have Paul Volcker proclaiming the end of too big to fail and stopping banks from trading their own accounts. These announcements are just another diversion. If firms could not trade their own accounts they might as well close their doors. Then came the President’s “State of the Union” message, which was just more party line fantasy. If he’d been smart he would have waltzed down the middle and played populist. Imbued with their own power the Democrats have again destroyed themselves. Far more important than all this is something more salient and that is how is the US and other nations going to service their debt and raise more funds in a depression?


The quest for money and solvency continues as Iceland, the Baltic States, assorted European states and now even Japan. Tagging along are the UK and US, both of which may have lower credit ratings by the end of the summer. There has to be credit creation to accommodate these sovereign needs. Any slowdown of credit for the system will strangle the system.


How can the US conceivably extricate itself from debt? That is $1 to $2 trillion deficits annually as far as the eye can see. It is already bogged down in an occupation in Iraq and a war in Afghanistan that stretches into Pakistan. That is all off budget, but it stretches already to more than $1 trillion. Then there is the phony, phantom war on terror the cost of which is unknown. That is the future. We are told we are in a recovery after two years of stimulus. We do see small signs of such in sectors, but unemployment stays high. If we could trust government statistics we’d have an idea of where we really are. Hoping that we’d believe 4th quarter GDP growth was 5.7% is ludicrous. The last figures for the 3rd quarter were adjusted downward twice from 3.6% to 2.2%. In Wall Street parlance that is called painting the tape. We have seen two of the largest stimulus packages in history and have really very little to show for it, in as much as the Treasury and the Fed have poured $12.7 trillion into the financial system, putting the public on the hook for $23.7 trillion. The Fed may have cut the creation of money and credit to the bone, but the US and world financial system runs on credit. Without that credit the system will collapse. This is why the addition of Paul Volcker to the immediate scene is not going to change things much, that is unless the elitists want to go into worldwide depression.


The current Democratic administration is now doomed to failure. The only way they were able to pass an increase of $1.9 trillion in the debt limit was to not seat the new Republican Senator from Massachusetts, Scott Brown.


We call that politics at its lowest level. Now we are saddled with a new limit of $14.294 trillion, or $25,000 of debt for every American. Like the Republicans, the Democrats just won’t stop spending. Of course if they do stop the system will come to a halt. All we are left with is a deficit task force, which will work in secret, that has to be voted on by all members of both houses, and the reports findings won’t be available until after the November election. This is another phony distraction to keep the public looking in the wrong direction. There will be no vote on the issue in 2011; it is a ruse.


The administration says it will cut non-defense discretionary spending by about 13%, but they just increased such spending by 17%. We might ask why didn’t they just rescind the increase? The reason is there can be no deficit reductions. In fact, if there is not more stimuli added then the economy will dip back into depression. This is the same mistake FDR made in 1937, and as a result America had to create another war to save itself from collapse. FDR’s methods are what are being used today and as in the 1930s, they won’t work today. Both are Keynesian nightmares created to put ultimate power into the hands of the elitists so they can force the world to accept world government. The tactics being used now are the same as in the 1930s, a 2-stage depression to be followed by a WWIII. We are now seeing the 1934 type rebound, that could last a few years, if enough stimuli are supplied. Deficits do not produce a solid recovery; they create a transitory recovery. Business knows this and as a result they won’t commit to expansion. They have no confidence in such plans, because they know once stimulus stops the economy will fall back again. They are also aware that stimulus is inflationary, just as monetization is. As far as the stock market is concerned we could be seeing a replay of 1936. Taxes had already risen by 5%, the deficit fell by more than 50% and the Fed cut back on M3 and raised reserve requirements, all of which was simply too much for the economy to handle. It receded and unemployment rose again. The Fed and the administration are well aware of this and that is why deficit cuts will not come and why more stimuli will be added. The economy is not back to any kind of “normality,” if in fact such a thing exists. We keep on hearing employment is a lagging indicator, when that is untrue. The only thing true about the unemployment numbers is that they are bogus.


Just as they did 73 years ago the Fed is contemplating removing reserves from the system. They already know what that will result in, so why would they do such a thing? Could it be that they want a repeat of 1937?


The administration is cutting very little and has no easy way to raise taxes to increase revenues. In addition after losing three straight special elections they’ll be in no mood to raise taxes with November nine months away. As we said earlier the whole Democratic Party is in serious trouble making them lame ducks. Any sort of tax increases will be cloaked in subterfuge. There is no hope of any budget changes for the better. The Democrats and many republicans are doomed and that is good.


What we have experienced over the past several years has been an orgy of securitization and leverage not previously experienced in modern times. That was accommodated by ridiculously low Fed interest rates. These conditions along with unregulated derivative creation led us to our present state of affairs along with mammoth consumption of mortgages by Fannie Mae, Freddie Mac, Ginnie Mae and the FHA. We were subjected to unbridled monetary and fiscal abandon.


Such unbridled greed came close to bringing down the entire financial system, which American taxpayers have been allowed to pick up the bill for. After all this we see absolutely no regulation in sight and the SEC and the CFTC continue to protect the titans of Wall Street as government looks on in total disinterest. This, of course, omits the Executive Order borne criminality, which has turned our free markets into controlled and manipulated fascist markets. People say what can I do? You can start by throwing almost every incumbent out of office and buy pressing the Senate relentlessly to pass the bill that includes an audit and investigation of the Fed. If you do not do these things you will end up living on your knees enslaved, as will generations to follow. Too big to fail has to be stopped along with moral hazard. Limits have to be put on leverage. The world of derivatives has to be unraveled. If we do not have serious financial reform the markets will continue to self-destruct. How can we conceivably allow hedge funds to remain offshore and unregulated? The FDIC is a joke and perpetually under-funded. Today they have $93 billion in assets with more than 2,000 banks in serious trouble that would cost $1 trillion to bail out. Those funds include $45 billion paid in by banks for their next three year’s dues.  Even with taxpayer assistance the private sector cannot recover. It has been just 2-1/2 years since these problems began and Wall Street and banking are right back doing what they did before, wildly speculating. How can the taxpayer continue to fund such insanity? Remember, zero interest rates have nowhere to go but upward. Adding more to the soup 40 states are essentially broke. Do you really think the crisis is over with 22.5% unemployment? We do not think so. There is no easy exit short of a purge of the system, which is inevitable. Any kind of stringent financial reform will bring the system down. Aggressive bank lending would bring about more monetization and more inflation. The markets believe it is back to business as usual. The only events that can bring us back to reality is a purging of the system and the end of Wall Street and the banking control of our country. The revolving door between Washington and NYC has to be dismantled. The credit system is broken and has to be changed and fixed. The shift has begun. The reign of Goldman Sachs over our government is in the process of ending. The successor will be JP Morgan Chase, which has been and will be every bit as bad as Goldman has been. The control is going to change but not the looting of the American people. The changes won’t come and the system will collapse, that is how the elitists retain control over our country. The final war for our freedom is underway.


Just as an example, if M3 is to remain at current levels and quantitative easing ends, where are the funds going to come from to recreate the credit structure? Who is going to supply the capital to fund a real estate revival? Foreigners are not increasing purchases of Treasury and Agencies. Who will fund that? By the looks of it the American saver will be tapped as government swallows up their retirement savings. What do they do in a few years when that wealth is gone? Will Americans use their savings to buy Treasuries; we don’t think so. How can over-indebtedness be corrected and at the same time consumption increased? It can only be accomplished by prolonged economic distress as debt is repaid and savings increased. Then again if government has to gobble up those savings, what is left for business to fund and expand? For a long time in the future in order to stay solvent, government will have to crowd out business in the quest for interest and debt repayment and in the creation of more debt. Presently our government is insolvent and that means devaluation and default has to eventually occur. The stimulus you have seen in various forms for the past 2-1/2 years is a façade. It has not produced permanent growth, only an extension of the problem. Thus far we see no recovery - only bogus government statistics. There has been no job and income growth and prices are increasing. How can recovery take hold as M3 is increased by only 3%, or 50% of the growth rate over the past 50 years? You have to say to yourself – does the Fed now want a deflationary depression? Only time will tell.


Last week was not a good one for the stock market as the Dow lost 4.1%; S&P lost 4.3%; the Russell 2000 fell 3.4% and the NASDAQ 100 lost 3.9%. Banks fell 0.8%; broker/dealers 2.8%; cyclicals fell 6.9%; transports 4.4%; consumers 2.1%; utilities 1.4%; high tech 4.5%; semis 4.6%; Internets 4.2% and biotechs 2.2%. Gold bullion fell $36.00 and the HUI fell 8.6%. The USDX gained 1.3% to 78.29.


Two-year T-bills fell 7 bps to 0.75%; the 10-year notes fell 7 bps to 3.60% and the 10-year German bunds fell 5 bps to 3.21%.


The Freddie Mac 30-year fixed rate mortgage rates fell 7 bps to 4.99%. The 15s fell 5 bps to 4.40%, as 1-year ARMs fell 7 bps to 4.32% and the 30-year jumbos fell 6 bps to 5.96%.


Fed credit increased $5.1 billion to a record 52-week high of $2.231 trillion. It is up $181.6 billion from a year ago. Fed foreign holdings of Treasury and Agency debt fell $5 billion again to $2.946 trillion. Custody holdings for foreign central banks rose $405 billion, or 15.9% yoy.


M2 narrow money supply declined $9.4 billion to $8.452 trillion; it is up 2% year-on-year.


Total money market fund assets fell $46 billion to $3.240 trillion. Year-on-year it has fallen $654 billion, or 16.8%.


Total commercial paper outstanding fell $10 billion to $1.092 trillion, having dropped $596 billion yoy, or 35.3%. Asset backed CP added $3.5 billion last week to $430 billion and yoy fell 42.6%.


As of December, 9.1% of borrowers had missed at least three payments, versus a year-on-year 6.5%. If the trend continues the FHA may run out of cash, forcing the federal government to use taxpayer money to cover the losses.


Our President’s projected 11% deficit for each of the next two years is equal to the country’s entire economic output. That condition will prevail over the next ten years. This erosion and the ongoing foreign wars will finally destroy America as the world’s preeminent power. Quite frankly, we believe any forecast outside of two years in today’s environment is useless. All we know is we do not see how conditions can improve.


Each day brings more revelations of efforts of the NY Fed and Goldman Sachs to hide the details of the criminal conspiracy of the AIG bailout. The Fed and Blackrock are becoming the administration’s Halliburton and KBR. This is a real crisis on the scale of Watergate. Corruption at its finest.


It should be noted the Blackrock has bought over a 5% stake in over 1,800 US equities.


          New York University Professor Nouriel Roubini, who anticipated the financial crisis, called the fourth quarter surge in U.S. economic growth “very dismal and poor” because it relied on temporary factors.


          Roubini said more than half of the 5.7 percent expansion reported yesterday by the government was related to a replenishing of inventories and that consumption depended on monetary and fiscal stimulus. As these forces ebb, growth will slow to just 1.5 percent in the second half of 2010, he said.


          “The headline number will look large and big, but actually when you dissect it, it’s very dismal and poor,” Roubini told Bloomberg Television in an interview at the World Economic Forum’s annual meeting in Davos, Switzerland. “I think we are in trouble.”


          Wall Street firms are loosening terms of their lending to mortgage-bond investors as markets heal, an RBS Securities Inc. executive said.  Repurchase agreement, or repo, lending against the debt has expanded so much since freezing in late 2008 that some banks now offer as much as 10-to-1 leverage and terms as long as one year on certain securities backed by prime jumbo-home loans, said Scott Eichel, the Royal Bank of Scotland unit’s global co-head of asset- and mortgage-backed securities.  ‘It’s getting very competitive,’ Eichel said we’re at the point where I don’t think we would feel comfortable if things go too much further.





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