International Forecaster Weekly

A Rise in Unemployment And Moral Hazard To Contend With

Bubbles come and go but the Fed remains, derivative madness, no good sense for liquidity, tariffs can turn the world, moral hazard in the media spotlight, fence building now to keep out the drug war in Mexico, flush with cash but actually insolvent...

Bob Chapman | March 24, 2010

The Dow rose 1.1%, S&P 0.9% and Nasdaq 0.4%. The Russell 2000 fell 0.4%. Banks rose 1.3% as broker/dealers fell 0.6%. Cyclicals fell 0.6%; transports gained 1.1%; consumers rose 0.9%; utilities 1.6%; high tech rose 0.7%, as semis were unchanged, along with Internets. Biotechs fell 0.5%. Gold bullion rose $5.00 and the HUI Index was unchanged. The USDX, dollar index, rose 1.2%.

The 2-year Treasury bill was up 4 bps to 0.995%; the 10-year notes were off 1 bps to 3.69% and the 10-year German bund was off 6 bps to 3.11%.

Freddie Mac 30-year fixed rate mortgage rates were off 1 bps to 4.96%, which is 1-1/4% higher than the 10-year note and that is where it is supposed to be. The 15’s were 4.33%. 1-year ARMs were off 10 bps to 4.12% and jumbos were 5.81%.

Fed credit surged $30 billion last week to $2.292 trillion y-o-y. Fed credit is up $25.1 billion or 12.3%. Fed foreign holders of Treasuries jumped $14.9 billion to a record $2.997 trillion, as custody holdings for foreign central banks rose $406 billion, or 17.7% y-o-y. The big question is did the Fed lend them this money and we won’t find out until the Fed is audited. We believe the Fed has created more than $1 trillion and lent it to foreign central banks to buy treasuries.

M2, narrow money supply, fell $13.3 billion to $8.513 trillion. It is up $1 billion y-t-d.

Total money market fund assets fell $73.6 billion to $3.07 trillion y-t-d. That is down y-o-y $354 billion, or 24%.

Over the past 50 years we have seen many bubbles. They have come and gone and the aftermath sometimes has lasted years, all from the courtesy of our privately owned Federal Reserve. We can remember those many years ago when we tried to explain to others that the Fed was owned by American and European bankers we were scoffed at. Well, finally the message has gotten through. These are the people who create bubbles for profit and power.

The ongoing real estate bubble, both residential and commercial, has been the biggest bubble since the late 1920s. In the second week of April of 2000, we recommended that our subscribers exit the stock market only three weeks after the market had topped out. We said we were headed for recession and that the only safe place to be was in gold and silver related assets. In 2001, the Fed decided to cut interest rates to relieve downside pressure on the stock market as it pressed downward toward Dow 7,200. A conscious decision had been made by the FOMC and Alan Greenspan to create a real estate bubble to at least temporarily bring back prosperity to the American economy. In 2002, aggressive cutting proceeded in interest rates. Mortgage debt rose from about $250 billion to $900 billion. By 2003, it was clear the forming of a bubble was in progress. By 2004, mortgage growth was up to $1.25 trillion and anyone who could put his or her mark on the bottom line was allowed to purchase a home. By 2005, some 69% plus of Americans owned homes with their partners the banks. In mid-2004 interest rates had finally started to move up again. In November 2004, we told subscribers that the bubble would break in the summer of 2005 in some areas of the country and that it was time to start selling, if you ever had any intention of doing so. In 2006, some regions were still on the way up, but the trend had been set. In 1-1/2 years interest rates from 2% to 5-1/4% and anyone of sane mind knew the end was near. The result of these low rates was that the Fed had deliberately created another bubble allowing a massive growth in total mortgage debt.

This madness was accompanied by massive derivative distribution, which is still with us, which Mr. Greenspan championed. He also strongly came out against regulation. That insured even more leveraged speculation to 70 to 100 times assets in hedge funds, brokerage firms, investment banks and even your corner bank. They were all totally out of control including Fannie Mae, Freddie Mac and Ginnie Mae.

We have contended since the bubble’s inception that the results were deliberately created and preordained to take down the American and world economy, which as we now well know ended in a credit crisis, the explosion of MBS, CDOs and ABS, particularly in Europe and the US. This credit bubble didn’t just happen. There wasn’t a mistake made. It was all planned and Greenspan and Bernanke deliberately looked the other way. In fact, Sir Alan Greenspan was knighted for his efforts in behalf of the Illuminists by the Queen of England. It was another giant scam by the Federal Reserve designed to bring the US and the world into world government and that plan is still in operation. The Fed is the moving force in this episode and that is why the Fed has to be audited. An investigation will show this and many other events that supposedly were mistakes, were well planned and executed. Those who believe it was mismanagement just do not get it. There is no complicity, only intent. Interest rates do not fall to 75-year lows by chance. The key to monetary management is that you do not allow bubbles to happen. Greenspan made the same mistake late in 1995, with his infamous massive irrational exuberance comment, when all he had to do was raise margin rates 5%, but he didn’t want to do that. He wanted or was instructed to not obstruct the dotcom boom, which also ended in collapse. These bubbles were deliberately created. It is the function of the Fed to make sure they do not happen in the first place. Monetary policy is not a rearguard action; it has to be the leading component of a sound money policy. Instead it has been light years in the opposite direction. Even today after 2-1/2 years in an ongoing credit crisis with 19 major countries on the verge of bankruptcy and the failure of their sovereign debt, all the Fed and other central banks are concerned about is bailing out banks, investment banks, brokerage houses and insurance companies, with taxpayer debt. Simultaneously the public is fed a bowl of porridge and is told by our controlled media that everything will be all right. Well, it isn’t all right. We are headed toward the biggest deflationary depression in the history of our country – far worse than 1929 and 1872.

Even today Mr. Greenspan believes liquidity should not be restrained. Supposedly this liquidity in the right hands in time will solve the problem. This is the same old song. Banks today have two sets of books and plenty of liquidity, but they are not lending and that is because they know what is coming and are preparing for it. Why do you think the BIS and FASD did not in January demand that balance sheets be market-to-market, not to model as they have been. They knew most of these financial institutions, even though flush with cash, are actually insolvent. There is plenty of liquidity, but the funds belong to the Fed not to the banks, which still average leverage of 40 to 1 after 2-1/2 years. The only thing that has been written off or losses taken on are the CDOs and ABS that the Fed has conveniently purchased from lenders to the tune of $1.2 trillion. Worse, the Fed refused to tell us what they paid for this toxic garbage and from whom it was purchased. These are the same criminals who talk about transparency. Their actions have been indefensible.

The result is continued instability and a grinding path toward an international financial collapse led by the US and England.

If we hadn’t left the gold standard on 8/15/71 we wouldn’t be in the fix we are in today. We do not have that standard, but after all else has collapsed we will then again regain that standard. We no longer have free markets and continued injections of liquidity will not work, only purging the system will work and its time is fast drawing to such a conclusion. Remember you cannot understand how this game works, unless you can understand the criminal Illuminist mind and their past history. Once you understand the rest is simple.

The specter of tariffs on goods and services is again in the spotlight. What has been used to destroy the American economy, that is, free trade, globalization, offshoring and outsourcing, is in the process of ending as we predicted it would. Tariffs are going to return. Paul Krugman says 25% tariffs against China should do the trick and he may be correct, but how about all the other cheaters who have been taking advantage of us for years. We say a 25% tariff for everyone, particularly those who deliberately reduce the value of their currencies. So what if the Chinese, Japanese and others dump dollars, American goods just get cheaper as those who left to manufacture or to maintain staffs in foreign countries come home to again employ Americans. All world currencies are in trouble, particularly versus gold, so who cares about devaluation? The fall of the dollar has been and will continue to be inevitable. If nations, especially China and Japan, sell dollars they will have to absorb some steep losses. Our trade and current account deficits would fall and the income from tariffs would reduce our unserviceable debt. This is not nonsense. This is reality. America cannot compete with slave labor wages. It never has been able to nor will it ever be able too. Transnational conglomerates and China have virtually destroyed our economy, and it has to come to an end. Our lone voice is finally being heard as a sidelight, China’s 30 million unemployed will grow, and that is likely to bring revolution to China’s totalitarian communist government, something pundits have seen to have forgotten. This is trade war and so it should be. What we are seeing now by those who want tariffs is no political posturing, but a way to allow America to economically survive and a way to reduce debt at the same time. The Chinese cannot allow the yuan to rise, because the rest of Asia will eat their lunch. That is unless we have worldwide devaluation and debt default and all currencies are pegged versus gold. Whatever is done will have to be done at an international meeting, but it’s coming. We predicted by the end of 2011. Perhaps we will be right.

The media talks about moral hazard and rightly so. Bailing out the financial sector falls into that category. Then we have, particularly on Wall Street, the syndrome of we neither admit nor deny, which is followed by a fine, which shareholders get to pay. Then there are the operations of “The President’s Working Group on Financial Markets,” which has a license to destroy free markets and to steal, usually with the passing of inside information. Then we have the collusion of the SEC and the CFTC, where no accountability exists. Crooks have no real fear of reprisal, particularly those in large firms. Public scrutiny has been enveloped in a cloud of arrogance. The Fed, treasury, government, banking and Wall Street do not care anymore that you know what they are doing. They believe they control everything and can do as they please. No rules, not even a Constitution. Our regulators know fully what is going on and won’t lift a finger to stop it. They just pick on small firms, brokers and newsletter writers who do not have the financial means to defend themselves. The problems associated with rigging the markets, particularly in gold and silver, are now so blatant even a high school student could recognize the manipulations of our markets. These people do whatever they want and get away with it. Fraud is endemic throughout the entire financial system. There is outright cooking of the books on a massive basis. Just look back at Bear Stearns and more recently Lehman Bros. What absolute audacity, and there is of course the derivative scam, which has yet to be addressed. As we project the criminality outward we can see the end of political and stable free markets. We cannot justify criminal activity and accept the adage we are doing God’s work. That is the ultimate insult. Foreigners see this and have begun to leave our markets in a big way. The day of criminality is drawing to a close, but everyone is going to feel the pain, like it or not.

Unemployment rates continue to rise, with the majority of U.S. metropolitan areas showing an increase in January, according to a government report.

In fact, there were 35 metropolitan areas with unemployment rates at or above 15% in January. California and Michigan remain the hardest hit, with 19 cities in California showing rates above 15%, according to the Labor Department. Michigan logged the next highest number, with 6.

In December, there were 25 cities with jobless rates above 15%, most of which were also in California and Michigan.

Overall, jobless rates increased in 363 of the nation's 372 metropolitan areas in January. The number of metro areas with jobless rates above 10% reached 187 in January. Contrast that with the national unemployment rate, which stood at 9.7% in January, according to the government's monthly jobs report.

There were only 2 urban centers with rates below 5% in January. That compares with 10 areas that posted rates below 5% in December.

Spotlight on California

Friday's report highlights the ongoing job woes for the nation's most populous state. Unemployment increased in all but one of California's 27 metropolitan areas during January.

El Centro, the one city where the jobless rate fell, continues to have the highest rate in the nation, at 27.3%. Merced, Calif., had the second highest rate at 21.7%, followed by Yuba City, Calif., at 20.8%.

However, high unemployment rates in California's agricultural areas are not unusual since many seasonal farm workers collect unemployment for several months out of the year in those areas.

Still, the job market remains strained in parts of California where farming is not the main industry. Los Angeles, for example, suffered a jobless rate of 12.4% in January, compared with 11.3% the month before. A year ago, unemployment in LA was 9.8%

Meanwhile, all 15 of the metropolitan areas in Michigan reported higher jobless rates in January.

One jobs bill down, what's next?

Michigan has suffered rising unemployment for several years as the state's manufacturing industry has gone into deep decline. In the Detroit metro area, unemployment rose to 15.6%.

Another city that has suffered from a prolonged job slump, Elkhart, Ind., reported a 15.6% unemployment rate in January. While that's still high, it marks an improvement over the 19.2% that the former auto-industry town posted a year ago.

Among the cities with comparatively low unemployment rates, many were located in North Dakota, Iowa and Kansas.

All four of the metro areas in North Dakota, for example, reported declines in the unemployment rate during January.

Our sources inside banking that attends Fed meetings says they expect millions of people to be laid off by small businesses starting in 2011, as they have to comply with new high insurance premiums. They said to watch the new regulations that the elitist are trying to put into place side by side with health care. They said they have seen the draft and it is terrifying. It encompasses a complete nationalization of banks under the guise of consumer protection. There you have it, dear subscribers. This is where we are headed. This is the same source who told us that the dollar would be officially devalued, that there would be debt default and that government would refuse to finance the FDIC after it ran out of funds.

Regulators have shut down seven banks in five states, bringing to 37 the number of bank failures in the U.S. so far this year.

The Federal Deposit Insurance Corp. on Friday took over the banks: First Lowndes Bank, in Fort Deposit, Ala.; Appalachian Community Bank in Ellijay, Ga.; Bank of Hiawassee, in Hiawassee, Ga.; and State Bank of Aurora, in Aurora, Minn.

Earlier, the agency said it had shuttered Advanta Bank, based in Draper, Utah; American National Bank of Parma, Ohio; and Century Security Bank of Duluth, Ga.

The bank failures this year follow the 140 that succumbed in 2009 to mounting loan defaults and the recession.

Citigroup Inc., the bank 27% owned by the U.S. government, will ramp up purchases of mortgages underwritten by other firms and keep more loans on its balance sheet after reversing a plan to scale back home lending.  Citigroup has decided mortgages are a ‘core’ product alongside consumer-banking staples savings accounts and credit cards, Sanjiv Das, who heads the… lender’s U.S. mortgage business, said... ‘In order to be full-service consumer bank we had to be able to offer mortgages to our customers’ Das said. ‘Then, we said, let’s now start to rebuild this business.’”  [This is to replace a cut back in lending by Fannie, Freddie, Ginnie and FHA.]

“The U.S. Federal Reserve’s balance sheet expanded… in the latest week as the central bank’s huge holdings of mortgage-backed securities continued to grow.  …the Fed said its asset holdings in the week ended March 17 grew to $2.311 trillion from $2.286 trillion a week earlier.  Holdings of mortgage-backed securities rose to $1.066 trillion from $1.029 trillion a week earlier.” 

The Development Bank of Kazakhstan, a state-owned bank that promotes industry, may cancel plans to sell $500 million of bonds to international investors this year after it received a $5 billion line of credit from China.” [They are in serious financial trouble.]

The number of U.S. households benefiting from lower mortgage payments under a government rescue program rose 6% last month to one million.

Florida temporarily suspended sales of Build America Bonds on concern that the Internal Revenue Service may block federal interest-cost subsidies, said Ben Watkins, who oversees the state’s debt sales.  The state halted issuance after a recent conference call in which the IRS said it may offset the 35% subsidy payments if an issuer owes the federal government for other programs, such as Medicaid, Watkins said.

California, the largest U.S. issuer of municipal debt, is pursuing its next sale of Build America Bonds, even as Florida suspended its offerings on concern that the Internal Revenue Service may block interest-cost subsidies.  ‘We plan to go full speed ahead with our BABs,’ Tom Dresslar, spokesman for California Treasurer Bill Lockyer, said.

The Obama administration announced on Tuesday that it is halting funding of the fence along the U.S.-Mexico border, but 59% of Americans believe the United States should continue to build that fence.

A new Rasmussen Reports national telephone survey finds that just 26% of adults disagree and think the building of the fence should be stopped. Fifteen percent (15%) more are not sure.

Support for the fence has been at this level for several years. In January of last year, 60% favored the continued building of the fence to help stop illegal immigration and drug trafficking. In August 2007, 56% felt that way.

Following this week’s shooting deaths of U.S. consulate personnel in Mexico, 49% say they are more concerned about drug violence along the border than illegal immigration. Thirty-nine percent (39%) remain more concerned about illegal immigration. This is consistent with findings in January 2009 amid news reports of escalating drug violence in Mexico.