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International Forecaster February 2011 (#2) - Gold, Silver, Economy + More

By: Bob Chapman, The International Forecaster



-- Posted Sunday, 6 February 2011 | | Source: GoldSeek.com

The following are some snippets from the most recent issue of the International Forecaster.  For the full 37 page issue, please see subscription information below.

US MARKETS

The Euro zone participants who have financial problems, Greece, Ireland, Portugal, Belgium, Spain and Italy are expected to deflate via austerity and at the same time be more competitive. This is supposed to be accomplished quickly so that overhanging debt can be extinguished. This, of course, is an impossible task. You have the IMF demanding austerity and EU members demanding growth.

 

The problems of the southern European states are similar to those of the states and municipalities in the US. The product of years of living beyond their means, and being accommodated by banks who knew they should have never been making the loans they were making. These entities cannot print money to solve their problems and they cannot grow fast enough to service current levels of debt, never mind service additional debt necessary to spark growth. They cannot manipulate their money supplies, because they have no control over them. They have no control over interest rates as well. They either find a way to pay the debt or they default. The only other alternative is to find someone to lend to them. That usually takes place at higher interest rates, due to the risk to the lender. These conditions are truly a quandary.

 

Each nation and state had its own set of problems. The most obvious was and is living beyond their means. Some had uncompetitive economies and some had one interest rate fits all, a condition that tricks unsuspecting countries into borrowing more than they can afford. Some had real estate and stock market bubbles; some had slow growth in part caused by lack of increasing productivity. Some had anemic savings or an economy dependent on loans from bankers who used a fractional banking system that they in error over-expanded. That is the way it was and still is.

 

We ask ourselves how did so many nations do the same stupid things and why would bankers use disastrous levels of leverage and lending? We certainly cannot totally ascribe it to greed or stupidity. Bankers are not stupid people. The policies followed by these nations were promulgated by the Federal Reserve and the City of London to bring about a crisis that would lead to world government. This is what this whole orchestration is all about.

 

As the Treasury’s debt figure wanders above $14 trillion, the question arises again will the US dollar remain the world’s reserve currency? The Fed says they’ll spend $900 billion by April or is it June? On the other hand a little bird told us they have already spent $1.7 trillion in their quest to fund the Treasury and Agencies.

 

The municipal market, as we predicted three years ago, is getting killed. Yields are up by .30% in January after having seen yields fall 1.50% since last October. The bond program Build America bonds is now over and that will keep municipalities from selling more bonds. The yields will be substantially higher, so you will see very few issues hit the market.

 

In California, Governor Moonbeam Jerry Brown, wants to raise taxes like Illinois has, but those terrible Republicans are blocking him from doing so because any tax increases must be approved by the taxpayers. As you are aware Fed Chairman Bernanke has ruled out bailouts for state or local entities. In addition, elitist Newt Gingrich is pushing for legislation to allow states to go bankrupt. That means all or part of pensions and benefits will be wiped out. If such a bill looked like it was being passed, munis and state bonds would again collapse for fear of default or partial default.

 

In Europe the Chinese have made it clear that they are buying euro debt bonds. As a result yields have fallen and the euro has rallied from $1.30 to $1.38 in a short period of time. The big question is how much are they prepared to buy and will their purchases make a major difference in the sovereign obligations of the problem countries? As we reflect we can now understand why Chancellor Merkle was so vehement when she announced that Germany would defend the euro. She had to have known that the Asian cavalry was on the way.

 

The Federal Reserve became law in 1913 and has since that time managed to assist the dollar in losing 95% of its value via its profligate issuance of money and credit. The express purpose of the Fed’s creation was to end panics, depression, recession and business cycles. It has failed to accomplish any of those things and as a result the purchasing power of the US dollar has been destroyed.

 

This experience has been a far cry from stability. We wonder what the House and Senate were thinking about when they passed such legislation in as much as the Constitution says that only gold and silver can be used as legal tender for payment. That is why the dollar had gold backing until August 15, 1971. The departure was caused by growing US debt and the ability of foreign nation dollar holders to redeem their dollars gained in trade for gold. Thus, you can see the Federal Reserve note is a fiat currency, one having no value or backing other than the good word of a bevy of American and foreign bankers.

 

There has never been any doubt in our minds that the Fed is unconstitutional. Over the past 50 to 100 years there has been little protest regarding its unconstitutionality until the last several years. Polls now show 70% of Americans want it done away with. The natural question is why did it take so long for people to understand that a group of bankers had been issued a license to steal. The answer has to be a lack of education. It has been a long hard struggle to make people understand how the fruits of their labors were being stolen by a band of common criminals. The people still collectively do not understand that these bankers own them and their country. They accomplish this by buying 95% of our legislators via campaign contributions, lobbying and by other illicit means. They also control the corporations that provide jobs in manufacturing and services. As they set out to control financial America so many years ago they also set out to control the educational process. That is one of the reasons nothing is discussed as to the true mission of the Fed. That is to totally control America society.

 

The Fed in control of the monetary system has been instrumental in the accumulation of debt by the US government. It does that by buying Treasury and Agency securities. The cash deficit should be in excess of $2 trillion in fiscal 2011 ending on September 30th. One of the things that most investors do not realize is that government does not use GAAP, which US corporations use. Companies have to report cash losses and non-cash losses from the increase in liabilities on there balance sheet. That means the unfunded liabilities such as Social Security and Medicare, etc. would take the liabilities up to $105 trillion.

 

Unfortunately, Fed funds rates are approximately zero. In 2003 they were 1% for the same reason, which is to pump up the economy. If you couple zero rates and major creation of money and credit you have a toxic mess. That is reflected in the dotcom and real estate booms and bubbles. As a result the net worth of Americans fell 9% during that period. As we wrote previously the rally and problems in the economy and the bear market rally we are deeply involved in will eventually collapse. Just be patient. Yes, that is correct, we never escaped the underlying recession. That means it takes two salaries to replicate purchasing power people had in 1971. This fact is deliberately hidden by government by it producing bogus statistics for CPI, COLA, PPI and employment. We will spare you the details, but bogus covers it all. The government says CPI inflation is 1-1/2%, we say it’s 6-3/4%. They say U6 is 16-7/8%, we say it is 22-1/4%. We are losing about 7% a year. That is why buyers of 10-year T-notes at 3.5% is such a guaranteed loser. The bottom line is the powers believe government should be purging the system, but they won’t do that. They want the game and profits to last as long as possible so they can loot the maximum from the American people. The US doesn’t have the choices they had in 1982, as the world’s largest creditor. Today it is the largest debtor and debt is 89% of GDP. Increasing interest rates won’t help unless you are thinking in terms of 25% to 30% and looking at a real purge. That is what the system has to have, but those in power are unwilling to do that. As a result we could have years of depression.

 

 In 1968 and again in 1980 inflation climbed and so did gold and silver and the shares. This time you will need much higher rates to stop inflation. In addition if we go to QE3 and another $2.5 trillion in spending we could have hyperinflation. It also won’t be long before 25% of tax revenues will be devoted to paying interest on debt. Interest rates are headed higher, so those numbers could change considerably over the next few years. The 10-year US T-note has moved from 2.20% to 3.64%. It is a fact that interest rates are rising in spite of massive buying of long dated paper by the Fed. Rates will move slowly higher to offset the damage caused by artificially low rates used by the Fed to keep the economy from collapsing along with the unbridled issuance of money and credit from out of thin air. Estimates are for 10% rates in 2 to 3 years. We see 10% in 2 to 3 years dependent on how much liquidity is dumped into the system. The unpleasantness has only begun.

 

            Mortgage applications in the U.S. rebounded last week from a two-year low. The Mortgage Bankers Association’s index of loan applications rose 11 percent in the week ended Jan. 28 after dropping 13 percent the prior period, figures from the Washington-based group showed today. The previous reading, the lowest since November 2008, was not adjusted to reflect a shortened work schedule due to the Martin Luther King Jr. holiday on Jan. 17, the group said.

 

          The housing market is being held in check by an unemployment rate near a 26-year high, even as manufacturing and consumer spending strengthen. Mounting foreclosures and increasing borrowing costs may also depress the industry at the center of the last recession.

 

          “What little momentum we did have late last year is, slowly but surely, slowing,” Leif Thomsen, chief executive officer of Mortgage Master, a Walpole, Massachusetts-based lender, said before the report. “We could see a very difficult year for real estate.”

 

The group’s refinancing gauge rose 12 percent after dropping 15 percent the prior week, the mortgage bankers’ group said. The purchase applications index advanced 9.5 percent following an 8.7 percent drop that left it at the lowest level in three months.

 

The average rate on a 30-year fixed loan rose to 4.81 percent last week from 4.80 percent the prior week. The rate reached 4.21 percent in October, the lowest since the group’s records began in 1990.

 

          The productivity of U.S. workers unexpectedly increased in the fourth quarter at a faster rate as companies sought to contain costs.

 

The measure of employee output per hour rose at a 2.6 percent annual rate, compared with a revised 2.4 percent gain in the previous three months, figures from the Labor Department showed today in Washington. Economists projected a 2 percent advance, according to the median forecast in a Bloomberg News survey. Labor expenses fell for fifth time in six quarters.

 

The number of Americans filing first- time claims for unemployment insurance fell last week, led by southern states that were affected by storms in prior weeks.

 

          Applications for jobless benefits decreased by 42,000 to 415,000 in the week ended Jan. 29, Labor Department figures showed today. Economists forecast claims would fall to 420,000, according to the median estimate in a Bloomberg News survey. The total number of people receiving unemployment insurance and those collecting extended payments decreased.

 

          The U.S. jobless rate unexpectedly fell in January to the lowest level since April 2009, while payrolls rose less than forecast, depressed by winter storms.

 

Unemployment declined to 9 percent last month from 9.4 percent in December, the Labor Department said today in Washington. Employers added 36,000 workers, the smallest gain in four months, after a 121,000 rise in December that was larger than initially reported. Payrolls were projected to climb 146,000, according to the median forecast in a Bloomberg News survey.

 

          Private hiring, which excludes government agencies, rose 50,000 in January. Factory payrolls increased by 49,000 in January, exceeding the survey forecast of a 10,000 gain. Employment at service-providers rose 18,000. Construction payrolls dropped 32,000 and transportation and warehousing jobs fell by 38,000. Retail trade employment rose 27,500. Government payrolls decreased by 14,000. State and local governments reduced employment by 12,000, while the federal government trimmed 2,000 workers.

 

          Average hourly earnings rose to $22.86 from $22.78 in the prior month, today’s report showed. The average work week for all workers fell to 34.2 hours, from 34.3 hours the prior month. The so-called underemployment rate which includes part- time workers who’d prefer a full-time position and people who want work but have given up looking decreased to 16.1 percent from 16.7 percent.

The report also showed an decrease in long-term unemployed Americans. The number of people unemployed for 27 weeks or more decreased as a percentage of all jobless, to 43.8 percent from 44.3 percent.

 

          With today’s report, the government issued revisions to payroll figures going back to 2006. It also announced the annual benchmark update, which aligns the data with corporate tax records and covers the period from April 2009 to March 2010. The Labor Department had estimated in October that payrolls for the 12 months would be cut by 366,000.

 

          Investors pulled money from U.S. municipal-bond mutual funds for the 12th consecutive week and added cash to domestic stock funds for the third straight time, the longest streak of deposits since April.

 

          Muni-bond funds had net redemptions of $2.7 billion in the week ended Jan. 26, the Investment Company Institute said today in an e-mailed statement from Washington. The withdrawals, triggered by concern that financially strapped cities and states may default, total $33.5 billion over the 12-week stretch.

 

          U.S. municipal bonds lost 5.3 percent in the three months ended Jan. 31, according to the Bank of America Merrill Lynch Municipal Master Index. Banking analyst Meredith Whitney stirred debate in the $2.86 trillion muni-debt market by predicting in December as many as 100 significant defaults this year reaching “hundreds of billions” of dollars. Investors added $3.2 billion to domestic stock funds in the most recent week. In April, the funds attracted money for four weeks in a row, ICI data show. The Standard & Poor’s 500 Index of U.S. equities has climbed about 3.7 percent this year.

 

          The Commerce Department said on Thursday that total factory orders rose 0.2 percent to a seasonally adjusted $426.8 billion contrary to forecasts for a 0.5 percent decline made by Wall Street economists surveyed by Reuters and following an upwardly revised 1.3 percent boost in November orders.

 

          Excluding the volatile transportation category, December orders increased by 1.7 percent after a 3.3 percent jump in November. It was a fifth successive monthly pickup in orders excluding transportation goods.

 

          Healthier manufacturing activity has helped lead recovery from the recession triggered by the 2007-2009 financial crisis and shows signs that it will continue to do so. Machinery orders were up 10.6 percent in December, helping offset a 12.7 percent decline in orders for transportation goods.

 

Unfilled orders eased slightly by 0.4 percent in the closing month of 2010 but the department noted that followed eight straight months in which orders had posted increases.

 

          China will curb its reliance on exports sooner than the U.S. can cut its budget and external deficits, removing a support from the dollar that will unsettle currency markets, Morgan Stanley’s Stephen Roach said.

 

          “In the next three or five years China will move aggressively to increase its private consumption and reduce its surplus saving,” Roach, who is non-executive chairman of Morgan Stanley Asia Ltd., said in an interview in Oslo yesterday. “The U.S. talks the talk, but there is actually no shred of evidence whatsoever that America is going to reduce its budget deficit over that same period.”

 

          China may post a trade deficit as early as this quarter as imports outpace sales abroad, the government said last month. The country’s reliance on trade to fuel economic growth close to 10 percent is now fading as its consumers grow wealthier, removing a key incentive for China to support the dollar. At the same time, the world’s largest economy estimates its budget deficit will swell to a record $1.5 trillion this year, as President Barack Obama channels stimulus to revive growth.

 

          “If we don’t move to address our deficit before China addresses its surplus then we are going to be facing some pretty significant external funding constraints,” Roach said. “That would lead to a significant downward pressure on the dollar and/or higher long-term U.S. interest rates.”

 

          China aims to reduce its trade surplus to less than 4 percent of gross domestic product in three to five years, central bank Deputy Governor Yi Gang said last year. Roach said the risk that China will cut its reliance on exports before the U.S. weans itself off external funding is greater than 30 percent. “Nothing is inevitable, but I think there is significant risk in that direction,” he said.

 

          The dollar has lost 13.5 percent against the euro since a June 7 high and is down 14 percent against the yen since an April 2 high. China pegs the yuan to the dollar.

 

The world’s second-largest economy is under pressure to allow the yuan to appreciate as inflation gains steam. Consumer prices rose an annual 4.6 percent in December, the Beijing-based National Bureau of Statistics said on Jan. 20.

         

China will need to allow the yuan to appreciate as much as 8 percent to avoid further inflation, according to Barton Biggs, who runs the New York-based hedge fund Traxis Partners LP. China, the world’s biggest foreign holder of U.S. Treasuries, saw its portfolio of the securities fall by $11.2 billion to $895.6 billion in November.

 

          “If they were to engineer a major reduction in their dollar-based holdings there would be consequences for the currency that would lead to a sharp appreciation and that would impair their export competitiveness,” Roach said. “They are not prepared to take that risk.” Still, China will gradually cut its holdings of U.S. assets as its consumers purchase more and save less, he said. “The world in general the U.S. in particular can expect sort of a natural, organic reduction of China’s buying of dollar-denominated assets,” Roach said.

 

          Nassim Taleb, author of “The Black Swan,” said the “first thing” investors should avoid is U.S. Treasuries and the second is the dollar.

 

          Taleb, a principal at Universa Investments LP whose 2007 bestselling book argued that history is littered with rare events that can’t be predicted by trends, also said he would rather hold euros than dollars, even as the region’s sovereign- debt crisis persists. “Euros have Germany, the dollar has nothing,” he said at a conference in Moscow.

 

          Taleb made similar comments at the same forum last year, saying “every single human being” should bet Treasuries will decline because of the policies of Federal Reserve Chairman Ben Bernanke and President Barack Obama. Bernanke has pledged to inject dollars into the U.S. financial system and cut borrowing costs by buying $2.3 trillion of Treasuries and other assets, a tactic known as quantitative easing.

 

          “As skeptical as I am about Europe, I prefer it by far to the United States,” said Taleb at the conference, hosted by Troika Dialog, Russia’s oldest investment bank.

 

The U.S. is just like Greece, only without the International Monetary Fund to enforce discipline, Taleb said today. Greece came close to defaulting on its sovereign debt last year before receiving a bailout from the European Union.

 

“We have a very dire situation in the United States, and every day that goes by it gets worse,” Taleb said. “Every day that goes by, we’re spending money. We’re increasing that cumulative debt.”

...

THE INTERNATIONAL FORECASTER

SATURDAY, FEBRUARY 5, 2011

02/05/11 (2) IF

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