-- Posted Sunday, 30 January 2011 | | Source: GoldSeek.com
The following are some snippets from the most recent issue of the International Forecaster. For the full 38 page issue, please see subscription information below.
US MARKETS
The US welfare state rumbles on and in some sectors of business it is being encouraged. We have to assume this attitude is based on more and increasing profits. Needless to say, it is cloaked in language that refers to the poor suffering people. The economy in the US and in many other countries is being run by and for major corporate interests. It is called corporatist fascism. Not many truthfully call it that, but that is what it is. We have government paid for and controlled by wealthy corporatist interest. In America you have $14 trillion in short-term debt and $105 billion in long-term commitments. Then there is the off budget items, such as wars and occupations that adds considerably to this debt, all attuned to keep the welfare state running. Both parties refuse to cut much of anything, although the Republicans say they will. We are skeptical after watching the tax bill become an $862 billion pork stimulus package. Discretionary spending is where the cuts will probably occur if there are any.
The cost of carrying this debt becomes more unpayable and onerous daily and there is little attempt to stop it. The Fed may control the short end of the Treasury bond market, but it has minor influence on the 10-year notes and 30-year bonds. As a result yields have risen and the spread in yields between short and long-term paper has grown to 32-year highs. Needless to say, holders of long-term notes and bonds want to be better compensated because they see more risk, as US debt grows uncontrollably higher. Short-term yields have stayed about the same because the Fed controls them. The demand for capital in small and medium companies has been muted by lenders reluctance to lend for the past two years. Zero interest rates have not helped these potential borrowers that create 70% of the jobs. Funds though are readily available to the major transnational conglomerates. Government and the Fed won’t talk about it, but they are manipulating all markets, and that is a long-term negative factor because everything they do is for their own benefit – not for the people. The state of political affairs could be worse but they certainly are not good. We liken the US economy to a rudderless ship being pulled and jerked by one special interest group or another from side to side never gaining equilibrium. As long as this situation persists no headway will be made in solving budget deficits, nor in neutralizing the welfare state.
At the same time we see red flags all over Europe. It is pointed out that in Europe, Greece is uncompetitive and has a sodden public sector; that Ireland borrowed too much and was moving more to a welfare state; that Belgium was a house truly divided with financial problems; that Portugal’s economy lagged like that of Greece and has similar major budget deficits, and that Spain doesn’t have a diverse enough economy and was literally destroyed by one interest rate fits all. What no one wants to contemplate is why did this all happen? That is because banks lent them all as much money as they wanted. The bankers, the professionals, should have never lent them such outrageous sums in the first place. Now the banks with their bad loans are demanding they be bailed out. It is ludicrous and the banks should be allowed to go bankrupt, they are the experts. They knew exactly what they were doing. That is Europe’s solution and the quicker they realize it the better off the Continent will be.
As of this writing gold has fallen about $100, and silver some $3.00. Support for gold lies anywhere between $1,280 and $1,340. Many are disappointed that both metals corrected, which is natural, but they are more upset that the correction was deliberately man-made.
Part of the corrective process was that Germany supposedly was going to save the euro, or at least that is what jawboning Chancellor Merkel seems to think. Germany is not about to bail out six insolvent countries. If they do or even participate in spending of more than the original solvent euro nation commitment of $1 trillion, they may become insolvent as well. The German people are well aware of this and they won’t allow it to happen. As we reported in the last issue contingency plans are already underway to reintroduce the Deutsche mark if necessary. The euro zone countries are facing major funding all year, but the heavy end will be in the first quarter with lighter demands in the second quarter. Germany is not about to bail out sick members or the euro, especially with Irish elections coming in three weeks. Thus, we see no eminent moves by Germany.
Gold has spent the last two years moving up in price as it challenged the US dollar for supremacy as the world reserve currency. Now, inflation is again in investor’s sights, as companies are forced to raise prices 6% to 15%, after having raised prices over the past year mostly in the form of small packaging. We’d call that stealth inflation. Manufacturers and producers think they are fooling the American public, but they are not. They are just demonstrating how deceitful they are. Raw materials costs are rising and they will continue to rise and so will real inflation, and that makes gold and silver move higher to reflect the loss in purchasing power of the public and the loss of value of all currencies versus gold and silver. In our previous report this week we pointed out the massive short covering by commercials in the gold pits. Unprecedented net short reduction, which can only portent a major upward move in gold and silver. The percentage of silver short covering was not nearly as successful for JPM, HSBC, GS and Citi. That is still yet to come. It will expedite the upside as it has done recently. All the elitists have done is ended their short bias and now will join you on the long side of the market. Their tactics have given you another opportunity to buy at cheaper prices.
The bond market yields will move slowly higher on the long end for the remainder of the year and thus, bonds should move slightly lower. Stocks, which are way overpriced, will eventually fall probably back to 10,000 on the Dow.
Conservative economists seem to think the economy will have a few years of stable to moderately deflating prices. We find that ludicrous with another $2.5 trillion being jammed into the economy. Even another deflationary down leg in real estate would not offset such spending, which follows $2.5 trillion spent under QE1 plus stimulus. That last attempt to increase employment was a failure. This time it will be the same unless there could be giant productivity gains, which is an unknown.
Recovery is difficult as savings persist at a 4% level. Wages are contracting as inflation increases sapping consumer purchasing power. Many countries are involved in currency wars and growth should slow sharply as tax breaks end. Small business, which saw lending fall 25% over the past two years are in no mood to borrow unless absolutely necessary, even if funds are available. There will be no aid from inventory buildup that was accomplished last year. Topping off resistance is an again falling real estate market, which does not tend to instill confidence. Then there is the possibility of $60 billion in budget cuts, which won’t be helpful to consumption. We cannot leave out forced austerity measures by municipalities and states. Perhaps including hundreds of bankruptcies. We also must consider illiquidity and major losses on the horizon for those holding municipal bonds as a drag on the economy. State budget shortfalls are more than $125 billion. Then consumers have to deal with tax increases that will curtail buying. We see political and social upheaval worldwide. The question is will it come to America? When we were in the brokerage business we always said when in doubt don’t. That is what is in process in America today. Chances are the market will correct and real interest rates will rise. All these factors mean it is going to be very difficult for GDP growth to exceed 2-1/4%, at a real cost again of $2.5 trillion.
The US Treasury Department announced on Thursday that it will shrink the amount of money it has on deposit at the Federal Reserve to fund emergency lending facilities because it is nearing the legal debt limit.
Beginning Feb. 3, Treasury will gradually decrease the balance in the Supplementary Financing Program to $5 billion from $200 billion. It can do so by letting short-term bills that finance it mature and not issue new ones. A Treasury official, speaking to reporters on background, said the action was being taken because Treasury was running near the $14.294 trillion debt limit. As of Jan. 25, it had $14.015 trillion of debt outstanding so only about $279 billion of legal borrowing authority was left.
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THE INTERNATIONAL FORECASTER
SATURDAY, JANUARY 29, 2011
01/29/11 (9) IF
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-- Posted Sunday, 30 January 2011 | Digg This Article
| Source: GoldSeek.com
