International Forecaster Weekly

Bonuses for Wall Street And Unemployment Elsewhere Continue To Grow

The motivations of men in high places, Goldman and Greece, dollar rally will soon end, trillions in debt while Wall Street makes record profits, shareholders pay for fraud proposed market reforms do not go very far, Bonuses greater than ever before on Wall Street, more problem lenders.

Bob Chapman | February 24, 2010

People should not underestimate the rational of those in high places because their agenda may be totally different then what they say it is. That includes the predicament of Dubai and Greece and a host of other nations that include the US and UK. The credit crisis, borne of the subprime crisis just didn’t happen; it was planned that way. Are we supposed to believe that the Fed took interest rates close to zero and that they flooded the monetary system with money and credit, because they were incompetent or stupid, hardly? The Fed, banking and Wall Street knew subprime loans were not AAA, but triple BBB. They all knew the syndication of these bonds were a fraud, which they allowed and which kicked off the credit crisis. Again, all is not as it seems to be. Thus, those of you who believe it was greed and incompetence are wrong. Up until four years ago it was Sir Alan Greenspan who sold his soul out to the Illuminists, now it is Ben Bernanke.

The troubles that countries are having with sovereign debt are growing exponentially. First it was Dubai supposedly with $100 billion in debt problems, which in fact may be underwater three or four times that number. Then, of course, there are a host of others. In the case of Dubai, British banks are holding the bag and probably will go down in flames. Greece cannot find any support even from Goldman Sachs. The Germans don’t want to help even though they knew Greece never was qualified to be in the euro. Greece is in a state of denial; is demanding reparations from Germany, which in 1960 paid a substantial amount to Greece in compensation. Germans for some time have wanted to exit the euro and the eurozone, some 71%. They have been sick and tired of carrying most of the rest of the zone with their balance of payments surplus. Greece makes up about 2.4% of GDP of the zone hardly enough to be concerned about. Eurozone governments would be better off writing off Greek bonds than subsidizing the country. Any bailout would be short lived, because so many other nations are in serious trouble. Let’s face it the eurozone is really Germany, France and the Netherlands.

For the last two months the dollar with the help of insiders Goldman Sachs, JP Morgan Chase and Citigroup, who knew the Greek problem was on the way, has had an unusual rally that is about to end. They obviously knew the IMF would announce another gold sale and that the Fed would raise the discount rate. How could they not know with Goldman controlling the Treasury and Morgan the Fed? They also knew like any other observant economic professional that M3 was being reduced to almost no expansion as was happening simultaneously by the ECB and England, an event that would tend to strengthen the dollar. Doing this they all are playing a very dangerous game. If they lose control deflation will overwhelm inflation and a deflationary depression could begin. That will happen eventually, but the elitists would like it to happen on their timetable. The US has to find a way to end monetization and they have run out of options. The only possibility is for government to steal Americans’ retirement plans. The trouble is almost all sovereign debt cannot be avoided. Now the only question is when will the big conference begin to revalue, and devalue currencies, settle debt default and form a new international currency-trading unit in part backed by gold? All nations have been well aware for a long time that sovereign debt and some corporate and individual debt will never be repaid. That is why nations have reduced dollar holdings from 64.5% of foreign reserves to 61.4%. With the exception of four nations sovereign debt is not worth the paper it is written on. They are Switzerland, Canada, Australia and Norway.

The dollar rally will soon end and speculators should begin to take short positions. All the good news for the dollar is out. For the moment it is the best of a bad lot. Then only real money is gold and silver. In the future more and more people worldwide will realize that and eventually there will be a stampede into the two precious metals. America will produce a debt to GDP ratio or 95% to 100% this year.

A staggering blow to the Illuminists is the exposure of the criminal cartel known as Goldman Sachs in their testimony to Congress and now helping Italy and Greece illegally circumvent eurozone rules. This will push the public away from investment and toward the safety of gold and silver.

In an attempt to smother inflation and hyperinflation the US government may follow China’s lead and increase reserve requirements. That may reduce inflation, but it would also bring the US closer to deflationary depression. One false step and the game is over. That risk also includes the ECB and England. Funds already are not being lent out and such further constriction could be disastrous. Credit has already dropped by trillions of dollars as unemployment continues to grow. There is now no question that there will be no recovery. How can there be when there is little money and credit available to grease the skids of recovery. All we are seeing is a switch to stage 2 of inflation. The question is will central banks lose control, and it is obvious they are acting in concert, and fall victim to a deflationary depression.

Domestically real estate foreclosures, both residential and commercial, continue to climb. The government’s attempt to assist the residential market has been pathetic in a situation that is overwhelming. By next year, 50% of homeowners could be under water. Business can’t get the loans they need, so they cannot increase employment and the more workers fired the more who have lost their homes.

The plight of the states in America is very serious. California, New Jersey and Pennsylvania are close to insolvency. These are followed by Michigan, Illinois, Ohio and Florida. Once the budget is passed some $25 billion will be split up among the states to keep them going. As we all know that isn’t the answer. Free trade, globalization, offshoring and outsourcing have softened them up – now they are ready for failure.

Welcome to corporatist fascist America. Fiscal deficits of $2 trillion a year while most transnational conglomerates, Wall Street and banks haul in obscene profits and our nation suffers 21-3/4% unemployment. Making matters worse have been wars and occupations in Iraq and Afghanistan, which have cost taxpayers off-budget losses of $1 trillion. A nation simply cannot be that dumb. It has to have been planned that way.

The latest TIC data had to be sobering for anyone who follows America’s debt problems. Chinese holdings of US Treasuries fell by $34.2 billion, or 4.3%. Japan increased holdings by $11.5 billion. This gives Japan the dubious honor of being the Number 1 Treasury holder in the world. Worldwide Treasury holdings fell $53 billion in December. $53.2 billion of sales were the result of foreign central bank sales. In 2008, their holdings rose $456 billion and in 2009, they fell $500 billion. As a result in 2009 the Fed purchased 80% of Treasuries via monetization.

The 2010 fiscal deficit will range from $1.6 trillion and $2 trillion. That should push debt to 95% to 100% of GDP. It should be interesting to you all that Treasury debt is now higher than GDP at $14.3 trillion. The US may not be as bad as Greece, but it is getting there. Our Treasury Secretary Mr. Geithner tells us even though the Fed has to buy 80% of Treasury bond issues our AAA rating is not in danger of being downgraded. In spite of his opinion Moody’s rating service continues its farce as not only the US deserve downgrading, so does a host of other nations. The bottom line is that debt for many nations is overwhelming, getting worse and in all probability cannot be regenerated, allowing an economy to rebound and be repaired. If conservative fiscal policies are put in place to cut back and pay off debt then there can be no recovery. Stimulus will unceremoniously end.

This day of reckoning or of choice is upon us. You either purge the system of its excesses, and allow the bankrupt to fail, suffer a doubling of unemployment, bankruptcy in the states, a fall in stock and bond prices, or you continue to stimulate with more dire consequences later. The game of chicken has begun and it’s a game the Fed and the Treasury will lose, no matter which way they go. Government is not gong to tell you the truth; you have to figure it out for yourself by listening to talk radio and going on to the Internet. Government won’t tell you that over the past ten years debt has increased 120%, or by $6.7 trillion, or $677 billion annually. The new average projection of additional debt over the next ten years is $853 billion annually. That is hardly fiscal restraint and it renders the debt unpayable. This is not a happy story, but government and the Fed have no intention of changing anything, although we believe they will soon be forced too, due to similar problems worldwide.

There is no question Greece and others have very bad debt problems, but we look at Greece’s problems, as a diversion, something to distract investors and Americans away from America’s growing unserviceable debt bomb. Foreigners have dramatically reduced purchases of Treasuries and real interest rates on 10-year T-notes are up 3/8% to ½% in recent months as buyers demand more yield on long dated bonds and notes. The Greeks took a ratings cut and the US, UK and others had the heat taken off for the time being. Unfortunately, Europe has as a result had fallout in the form of pressure on the euro, which may be on its way to being a non-currency. In fact future events may not only end the euro, but the European Union as well.

Last week the Dow rose 3%; S&P 30%, the Russell rose 3.3% and the Nasdaq 100 rose 2.4%. Banks rose 4.2%; broker/dealers 2.9%; cyclicals jumped 4.2%; Transports 3.5%; consumers 2.8%; utilities 3.6%; high tech 2.8%; semis 3.1%; Internets 3.3% and biotechs 3.2%. Gold bullion rose $25.00 and the HUI rose 2.25. The USDX rose 0.4% to 80.57.

Two-year T-bills rose 9 bps to 0.87%, as 10-year notes rose 8 bps to 3.78%. German bund yields rallied 9 bps to 3.28%.

The Freddie Mac 30-year fixed rate mortgage rate declined 4 bps to 4.93%; the 15’s fell 1 bps to 4.33% and one-year ARMs fell 10 bps to 4.23%. The jumbo 30-year fixed rate fell 2 bps to 5.905.

M2 narrow money supply increased $14 billion. It has declined $27 billion ytd, as M2 expanded 14.9% yoy.

Total money market fund assets fell $37 billion to $3.161 trillion. In the first seven weeks of the year it has fallen $133 billion, dropping 18.5% yoy.

Total commercial paper outstanding increased $3.9 billion to $1.138 trillion. I has fallen $383 billion yoy, or 25.2%.

This week there is another $126 billion-series of Treasury auctions. The first tranche of 30-uear inflation-protected bonds was a very hard sell. The bid to cover was 2.45, which was only fair. Indirect participation was 42%.

The January Chicago National Activity Index was 0.02.

Four more banks were seized on Friday in an event we call the FDIC, Friday Night Financial Follies; that is 20 banks gone so far this year. We are looking for 500 to 1,000 failures over the next 1-1/2 years. The FDIC only has about $92 billion left.

The markets were again shaken, but they held up, as it was revealed that Goldman Sachs created three phony London firms to route cash for the Greek Central Bank to allow them to issue bonds to circumvent ECB rules. This again points out the systemic corruption in the international financial system, particularly in NYC and London.

The rise in the discount rate is meaningless, because very few institutions use the Fed’s discount window. As we mentioned before in the late 70s gold made its big run as interest rates rose. The BLS reports the CPI in at 2.63% when in reality it is over 7%. One fifth of all US mortgages are under water. Deflationary depression will come. The question is when? Worse yet the Treasury finds it harder and harder to sell bonds, as China sold $34.2 billion worth.

The Bank of America won approval of a $150 million settlement with the SEC over the Merrill Lynch merger and as usual nobody went to jail. Illuminists never go to jail. BoA failed to properly divulge Merrill’s losses; then it authorized $5.8 billion in bonuses. The shareholders get to pay the fine for the fraud. There is no longer a thing called crime and punishment.

The big teacher layoffs have begun. San Francisco will lay off 900; California could cut 100,000 jobs in K to 12 by the end of June. Santa Barbara and San Luis Obispo counties are cutting law enforcement and shutting youth correctional facilities.

Twenty percent of workforce is underemployed by working part-time. They spent 36% less on household purchases then fully employed. They make up 16.5% of workers officially, but Gallup shows 19.9%.

Confidence among U.S. consumers fell more than anticipated in February to the lowest level since April 2009 as the outlook for jobs diminished, a sign spending may be slow to gain traction as the economy recovers.

The Conference Board’s confidence index declined to 46, below the lowest forecast in a Bloomberg News survey of economists, from a revised 56.5 in January, a report from the New York-based private research group showed today. Concerns about the economy and the labor market pushed an index of current conditions to its lowest in 27 years.

Home prices in 20 U.S. cities rose in December for a seventh consecutive month, indicating the industry at the heart of the worst recession since the 1930s is stabilizing.

The S&P/Case-Shiller home-price index increased 0.3 percent from the prior month on a seasonally adjusted basis, more than anticipated and matching the gain in November, figures from the group showed today in New York. The gauge was down 3.1 percent from December 2008, the smallest decline since May 2007.

New York’s budget deficit for this year may be $2 billion, or 43 percent wider than projected earlier this month by the Division of Budget, comptroller Thomas DiNapoli said.

Tax collections by the March 31 end of the state’s fiscal year might be less than anticipated, according to DiNapoli. Also, a $300 million payment expected from developers of a gambling parlor at Aqueduct Racetrack, $200 million from the Battery Park City Authority and $250 million from a tax amnesty plan may not materialize, he said.

Problem lenders climbed to the most in 17 years, and the Federal Deposit Insurance Corp. fund protecting customers against bank failures extended its deficit into a second quarter, the agency said.

The FDIC included 702 banks with $402.8 billion in assets on the confidential list as of Dec. 31, a 27 percent increase from 552 banks with $345.9 billion in assets at the end of the third quarter, the regulator said today. The agency said the deposit insurance fund had a deficit of $20.9 billion.

“Consistent with a recovering economy, we saw signs of improvement in industry performance,” FDIC Chairman Sheila Bair said in a statement. “But as we have said before, recovery in the banking industry tends to lag behind the economy, as the industry works through its problems assets.”

Regulators are closing banks at the fastest pace in 16 years, seizing 20 lenders through seven weeks this year after shutting 140 institutions in 2009 amid loan losses stemming from the collapse of the home and commercial mortgage market. A total of 28 banks failed in 2007 and 2008 combined.

The insurance fund deficit widened to $20.9 billion from $8.2 billion in the previous quarter, when the account posted its first negative balance since 1992. The FDIC last year required banks to prepay three years of premiums, raising about $46 billion for the fund on Dec. 30, the agency said today. The agency also has the authority to tap a $500 billion credit line with the Treasury Department.

The Obama administration is backing off a plan to bar commercial banks from engaging in proprietary trading, favoring instead a watered-down version of a key tenet of the proposed "Volcker rule" governing how banks operate, according to people familiar with the situation.

Sources told The Post that instead of issuing an outright ban on prop trading -- or trading done on behalf of only the bank itself -- the White House will propose that federally insured banks keep higher cash reserves if they want to run such trading desks.

The about-face comes amid signs the administration faced an uphill battle selling lawmakers and Treasury officials on an outright ban.

President Obama on Jan. 21 proposed sweeping banking industry reform, outlining plans that would bar a bank from owning, investing or sponsoring hedge funds or private equity funds, and running trading operations that did not specifically serve customers.

The proposals went by the shorthand name "the Volcker rule," as they were championed by former Federal Reserve Chairman Paul Volcker.

However, in the month since the announcement stunned Wall Street, sources said Volcker's ideas have been "marginalized" and are not expected to figure prominently in whatever the Senate formulates in the coming days.

"My understanding is the White House really does believe in it, but Treasury and the Hill do not, so it's not going very far," said one person close to the Treasury Department.

Wall Street bonuses rose 17 percent in 2009 from a year earlier as the securities industry rebounded from the financial crisis, New York State Comptroller Thomas DiNapoli said.

Financial firms disbursed $20.3 billion compared with $18.4 billion in 2008, DiNapoli’s office calculated, basing its estimate on personal income-tax collections. It doesn’t include stock options or other types of deferred pay. The bonus pool was the second-largest ever, DiNapoli said in his yearly report.

Cash and stock bonuses fell about a third from 2007, he said. New York State’s budget deficit is estimated to be $8.2 billion, 10 percent more than estimated in January, because Wall Street’s cash bonuses are less than forecast, Governor David Paterson said Feb. 3. Personal income tax collections in January were $1 billion below the $7.08 billion the state projected.

“It would be preferable to have predictable growth and profitability,” DiNapoli said in an interview on Bloomberg Television today. “With New York depending on the sector for budget health, we need Wall Street to be profitable.”

The average bonus for the industry was $123,000 last year, the comptroller said. Wall Street has added 3,900 jobs through December and DiNapoli said he expects that trend to continue. He said the increase in tax revenue from higher bonuses won’t solve New York’s budget problems.