International Forecaster Weekly

Bailouts for Almost Everyone But Economy Will Still Languish

bailout may start a rally, short now and short later, States in tough shape, record bankruptcies in 2009, we are only at the beginning of a long fall in the economy, Madoff victims want a bailout, financial crises are protracted affairs, government debt set to explode in the coming year, mainstream economists didnt forecast economic downturn 

Bob Chapman | January 7, 2009

The anticipation of continued Treasury and Fed monetary creation, a $1.3 trillion or more budget deficit and a trillion dollars in stimulus spending by the new administration should cause a market rally in January and perhaps a while longer.

Those who are short the market can consider taking some profits and re-shorting later. We know some of the subscribers have massive gains. You should be all in on gold and silver coins and shares and add to positions whenever you can.

When you have $3 trillion, perhaps $4 trillion, being jammed into the economy you have to expect temporary relief. The low of 7,392 and 7,268 on the Dow will be tested in the first half of the year and if not broken to the downside it will do so in the fall when the hoopla is over. The second half of 2009 will be filled with much higher inflation and a major rise in gold and silver prices.

As corporations make major layoffs along with state, city and county cuts, the federal government will become the employer of last resort. Thirty-year fixed-rate mortgages will average 4.5% during the first six to nine months of the year.

States are in tough shape. Many will raise taxes and some will be laying off workers. They are also being forced to curtail Medicaid. When people lose their jobs they lose their health coverage. Medicaid payments to hospitals and nursing homes will be cut further this year. Many are halting payments for healthcare services not required by the federal government, such as physical therapy, eyeglasses, hearing aids and hospice care. Mind you, Medicaid covers 50 million Americans. That makes Medicaid the second-largest expense in every state budget. Thus, Congress is considering $100 billion to increase the share of Medicaid’s that the federal government would pay during the next two years.

Twenty states have cut Medicaid some 10% or more and the results of cuts over the next few years will be serious.

We have commented on the comparison between Japan in 1991 and today’s financial problems. There are comparisons, but today’s situation in the US and now worldwide, is much worse. The Fed, our Treasury and central banks in other nations are attempting to counteract deflation with massive doses of money and credit and zero interest rates. The Japanese did something similar and have languished in recession and depression ever since. Japan had little debt and had a wide open market in the US to export too. They did have $1.3 trillion in bad debt in the banking system that had to be worked off. Until the last several years the yen was in a weakened state. A good part of recent strength was due to the yen carry trade, which is now playing itself out. That trade was the brainchild of the US treasury and the Fed to keep world markets from collapsing.

What is in process now is a falling US dollar. We saw the dollar rally in late 2008 – a rally created by central banks and Treasuries. It was to present a buffer for the dollar, cheapen other currencies to make their exports more competitive and to suppress gold prices.

In 2009, there will be record bankruptcies. There will be a large drop in consumption from some 72% to 69%. Those are problems the Japanese did not have to face; nor an unbelievable debt owned by foreigners and a very negative balance of payments deficit. Japan did not have massive toxic waste in the form of CDOs and SIVs, a form of mortgage bond. Japan did not have massive monetization or unbelievable corruption, nor did they have trillion dollar wars going on. Japan’s experience may have been somewhat of a guideline, but that is where the similarity ends. Japan has had a 16-year walk in the park compared to what the US and most of the world is facing today. The lies will fall away as the sordid truth becomes known and the “Great Depression” becomes a secondary event.

The S&P 500 will be lucky to record a $42.00 earnings estimate for 2009. That puts the forward price earnings ratio at 20. The historical average is 14-1/2% to 15% and in depressions 8 to 10 times earnings. The market supposedly has factored $42.00 into its performance, when historically the market has done a terrible job pricing in bad news, especially with all the manipulation going on. We expect a 70% fall during this depression or the Dow at 4,200. That means on these 2,000-point Dow rallies you sell into the rally or short into it. We believe S&P earnings will be $35.00. By the way, those S&P earnings were $24.67 in 2001 and $27.57 in 2002. The bear market that began in March of 2000 is still in force. The move in the Dow from 7,268 to 14,100 was manufactured by our government via low interest rates, large injections of money and credit and non-existent lending practices.

4-1/2% 30-year fixed rate mortgages for resets and those who would like to refinance for lower monthly payments and equity withdrawals are in vogue again. That means more money to spend in the economy or a chance for the prudent to pay down debt. These benefits should last about nine months and then rates will rise again. Another government engineered short-term market manipulation. Many of the resets and many of the new loans should not be made. We are back to the same subprime-ALT-A problem again. The downside is that all of these loans are guaranteed by FHA, Fannie Mae and Freddie Mac. The taxpayers get to pay for the defaults. All this liquidity will bolster the economy later in the year, but at the same time commodity prices will rise and inflation will boom. Those who see the slowing in descent of the recession and are calculating on the $1 trillion Obama stimulus package and are looking for a bottom in the recession will be severely disappointed. What we are seeing is not solutions. They are band-aids that only extend the recession. The causes of economic decline still underlie the economy. Housing will go sideways price-wise, because inventory is still coming into the market. That should last into the fall. Then interest rates should rise again.

MZM is up 16.6% in the last two months or over 10% yoy. Normally the narrow money supply rises 4% annually. In the fourth quarter it was up 990%. That is almost 1,000% annually. This liquidity cannot be withdrawn from the system, because if it was there would be an implosion. The amount of increase is moderate by standards set over the past four years and that is only because of zero interest rates and a $9.4 trillion injection of liquidity into the system recently. Worse yet, all major and secondary nations are doing the same thing. That is because they are all deeply in debt, have giant budget deficits and high inflation. Actually the inflation is welcome at this point because it covers up the falling value of assets. This group may enjoy low or zero interest rates, but they won’t last beyond the fall. Once those real interest rates rise gold will take another bound upward along with silver. In the fall gold should be selling between $1,700 and $2,000 an ounce minimum and the economy and the stock and bond markets should be again correcting downward. These events will then take the US and other economies deeper into recession.

The figures we have presented on earnings alone tell you the economy and the stock market will fail badly later this year. Unfortunately, this in only the beginning.

We just cannot believe the stupidity of mainline economists and analysts. Most, like Rich Yamarone, forecast that there was just a 15% chance of a recession in 2008. He is director of economic research at Argus Research in NYC. What we have is the longest and worst recession since WWII. This is why investors have lost over 40% of their money in the stock market over the last 18 months. What is worse 80% of these forecasters agreed with Yamerone. As we have told you before these kinds of predictions are normal. If these people step out of the box and tell the truth they lose their jobs. The insiders control the system. This is why we are so deeply resented. We are right and we tell the whole truth. Officially the recession is a year old, but in reality it is two years old. There is no way out of this one without a purge and probably a revolution.

The bankers that create money out of nothing via the fractional banking system are licking their chops as states fall further into debt - like 44 states have deficits and states like Minnesota are thinking about the sale of a premier golf course, sports complex, airport and zoo. Plus, the New York, Massachusetts and Illinois are thinking of selling or leasing toll roads, parks, lotteries and other assets. These people are all idiots.

The dilemma of inflation and deflation remains relatively obscured, because 95% of economists and analysts are employed by banks, Wall Street, insurance companies and corporate America. If they speak out and tell the truth they get fired for their honesty and integrity. This allows Wall Street and the bankers to loot the public not only by printing and controlling money and credit but also employing inflation as a result of their monetary and fiscal profligacy. Someone should tell them that eventually that if you loot we shoot. The entire vast operation out of Washington and NYC is connected with foreign equal numbers worldwide, an international Mafia. The idea is to create enough liquidity to keep the game going and to get richer in that process.

This time the system is in the process of being taken down to implement their New World Order and they are having major problems holding the system together. The big question in this takedown process is can the Illuminists keep all the foreign creditors of the US in line? We do not know for sure, but we do not think so. The first step in that direction will be a breakdown in the World Trade Organization, broken treaties and protectionism, which will force all nations to use protective tariffs on goods and services.

Then there is the issue of manipulation by the US Treasury and the Fed as directed by our sitting president and Wall Street. All markets have been abused since October 1987, but none so much as commodities and particularly gold and silver. Both are the antithesis of fiat money and when they are rising in value they send off an alarm bell that all is not well in the monetary system. That is why their suppression is so important to the elitists, who know in the final analysis the Ponzi scheme collapses. This manipulation has corrupted the entire system. The leaders of the fraud are JP Morgan Chase and Goldman Sacks along with others. They control our government. That is why you see so many of their former employees in key government positions. They engage in insider trading thousands of times a day. They determine which firms and hedge funds survive via lending or not lending. They are the powerful forces behind naked shorting and that is why the SEC still has done little about the practice. Both the CFTC and the SEC are controlled by this cabal and do little or nothing to protect the public. These elitists destroy everyone in their path either by destroying their business directly or by having the SEC or the CFTC do it for them. This is official Wall Street and big bank policy. When you come right down to it the whole system is corrupt.

As far as government is concerned there will be another Illuminist transition but no changes, except perhaps in Iraq. Financially and economically there will be no change. We will be treated to the same gang of CFR, Trilateral, Bilderberger thugs that we have been every four years. That means there will be no changes.
Arizona could run out of money to pay its bills as early as next month, state Treasurer Dean Martin says.

And unlike last spring, when the treasurer issued a similar alarm, this time there won't be reserves to cover the bills. Martin says the state will be forced to borrow money in the short term - the first time since World War II - and adds that there is little that lawmakers can do to avert it.

"No matter what they do with the budget, we'll be negative in March or April," Martin said.

He has shared his sober analysis with the incoming legislative leaders, as well as Jan Brewer's gubernatorial transition team.

"Essentially, the state is broke," said House Speaker-elect Kirk Adams, R-Mesa.

Adams said he's not sure he agrees with Martin's belief that there is no way to avoid borrowing, saying lawmakers are hoping to rein in the state's $1.2 billion budget deficit through spending cuts.

Sears Holdings, which has reported a drop in sales every quarter since chairman Eddie Lampert merged Kmart and Sears in 2005, will stop matching contributions to its workers' retirement plans, the company reported.

The move will go into effect Jan. 31.

The struggling retailer told employees it would resume the match when its "financial performance improves to a level adequate to support" the outlays.

Angry victims of Bernie Madoff's alleged $50 billion Ponzi scheme want a bailout from Uncle Sam, too.

On the heels of Washington's $700 billion rescue of the nation's ailing banks and the $17.4 billion rescue of the auto industry, the Madoff victims are now calling on the US Treasury to augment the $1.6 billion in the coffers of the Securities Investor Protection Corporation - the organization set up to help victims of collapsed brokerages.

SIPC has pledged just $500,000 to each Madoff victim who had an open account with the fraudster's firm in the past 12 months - but that may not even come close to covering the Madoff losses, which are thus far estimated to be somewhere between $30 billion and $50 billion.

"What if it turns out that SIPC needs $15 billion to compensate all the victims because this fraud is bigger than anything they imagined could happen?" said Michael Sirota, a lawyer representing KML Investments, a firm that claims to have lost some $80 million to Madoff. "I think the US government should step up with funds to help like it has for the banking sector and the automotive sector."

The Fed increased its balance sheet for the week ended Dec. 31, 2008 by $39.255B. Pretty soon we’ll be talking real money.

The Aftermath of Financial Crises”, by Professors Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard, that notes, Broadly speaking, financial crises are protracted affairs. More often than not, the aftermath of severe financial crises share three characteristics. First, asset market collapses are deep and prolonged. Real housing price declines average 35 percent stretched out over six years, while equity price collapses average 55 percent over a downturn of about three and a half years. Second, the aftermath of banking crises is associated with profound declines in output and employment. The unemployment rate rises an average of 7 percentage points over the down phase of the cycle, which lasts on average over four years. Output falls (from peak to trough) an average of over 9 percent, although the duration of the downturn, averaging roughly two years, is considerably shorter than for unemployment. Third, the real value of government debt tends to explode, rising an average of 86 percent in the major post-World War II episodes.