International Forecaster Weekly

Consumer Confidence At All Time Low

A malestrom of money and credit, consumer credit bubble soon to break, ever increasing losses, issues with price fluctuations and currency adjustments, waiting for the ETF debacle to happen

Bob Chapman | June 25, 2008

The Conference Board's consumer confidence index for June came in at an abysmal 50.4.  This reading is down 13.25% from May's 58.1, is less than half of last June's 103.9 and is the lowest reading in 16 years.  The "experts" were expecting 56.5.  And then there is the index of consumers' expectations for the future, which hit an all-time low, declining 13.31% to 41.0 in June from 47.3 in May.  Seventy percent of our economy is driven by consumer spending.  This simple set of facts tells the whole story.  It is a certifiable disaster in the making.  Next, let's not forget the hundreds of billions in yearly home equity extractions that have all but completely dried up.  Add in the next bubble to break, consumer credit, where people with no savings have lived paycheck to stagnant paycheck amid 12.625% inflation, thereby forcing them to exhaust available lines of credit just to keep from going under, and you move beyond disaster into a nightmarish, catastrophic, systemic breakdown of epic proportions worldwide.


The US supertanker economy has been afloat on a maelstrom of money and credit that has carried it into the rocks of hyper-stagflation, dollar destruction and fiscal profligacy as its occupants listened to the siren song of globalization, free trade, off-shoring, outsourcing and both legal and illegal immigration.  The gaping holes in the hull cannot be patched.  The supertanker is taking on water faster than Ben the Buck-Buster Bernanke can bail it out with his 1930's retro bailouts of banks and non-banks alike.  The Fed and Congress have created a financial monster that threatens to blow oil prices into the ozone, the economy down into the earth's core and a mountain of derivatives, now closing in on a notional value of a quadrillion dollars, into an inter-dimensional wormhole where no one is quite sure what will happen, but whatever it is will have negative cosmic implications for markets around the globe.


Consider the following when deciding whether the Fed can raise its funds rate:  The FDIC insured banks in 2007 had net income of $105.5 billion, a very poor return of .86% on their collective assets, which are in the $12 to $13 trillion range.  Most of those assets are in bonds, derivatives and various types of consumer and commercial debt, with a smattering in stocks and customer deposits.  The market values of these assets are interest rate sensitive.  Rising rates reduce bond, derivative and debt principal, cause losses for those on the wrong side of interest rate swaps, bring stock markets down due to economic tightening and raise customer expectations concerning rates of return for money on deposit.  Each .25% rate hike could potentially impact US banking's $12 to $13 trillion asset structure with yearly losses and write-downs of about 30 billion dollars (.0025 x 12 trillion) resulting from reduced asset values and increased costs.


In addition, the Fed is floating and rolling over about $400 billion a month in money and credit to keep the banking fraudsters from imploding, and that could mean a decrease in profits from reduced spreads on the magnitude of a billion per year for the system as a whole.  Remember, due to fear of default, insolvency and a lack of confidence and transparency, banks are hoarding and investing their money instead of re-lending it, so the fractional reserve multiplier is not working and banks are profiting from spreads between returns on their investments and the cost of money used to make those investments.  This is one of the major reasons that commodities have gone wild.  The commodities markets are the only places left where investors can make a profit with little downside compared to other markets, and this is where big financial institutions are exploiting the Enron loophole to manipulate markets and increase spreads.  The other big driver of prices for commodities is the declining value of the dollar.


So if the Fed hikes its funds rate twice by .25%, the losses and write-downs for US banking could be over $60 billion, which would wipe out about 57% of last year's gains.  Note that due to whopping subprime losses, in Q4 for 2007, banks only netted $600 million, while in Q1 for 2008, they netted only $19.3 billion.  This means that $60+ billion in losses and write-downs could result in a complete wipe-out of the banking sector.  And never mind the hundreds of billions of losses that have already accrued but have not yet been recognized due to "creative accounting" methods that have been allowed by regulators to buy the fraudsters more time.  And never mind the gargantuan negative impact on real estate markets which might result from higher mortgage rates for purchases and refinances, such as defaults going up, sales going down and real estate prices dropping into the toilet, along with collateral values for assets securing real estate backed bonds and derivatives a/k/a toxic waste.  And never mind the ever-increasing losses from ever-accelerating defaults in consumer credit like credit card balances, car loans and student loans.  And never mind what could happen to those financial institutions on the wrong end of interest rate swaps and credit default swaps if hundreds of banks get vaporized.  This year and next, there might not be any retained earnings of any kind that might otherwise have been available to support deteriorating capital positions.


Note how substantially lower rates have failed to increase banking sector profits due to massive losses in real estate toxic waste derivatives.  And now we hear inane jawboning about rate increases.  You just can't make this stuff up.  Next, Wednesday's FOMC meeting will produce no change in the funds rate with more jawboning about concern for inflation and the need for a strong dollar policy.  This duplicitous Fed-speak will be blathered into the ears of investors solely to suppress gold and silver prices, with odds increasing for two .25% rate hikes by year end, rate hikes that will probably never materialize.  How laughable.  


Raising the Fed funds rate to support the dollar at this point would be tantamount to committing national economic suicide.  The Fed cut too fast and has now waited far too long to achieve any positive impact by raising rates, especially by such miniscule amounts.  Our inflation is quickly approaching the peaks of 1980-1981 of around 14% to 15%, with about two percent left to go.  At that time, Paul Volcker raised the Fed funds rate in large leaps to the 17% to 20% range during the last quarter of 1980 and the first three quarters of 1981.  That is the magnitude of rates that would be necessary to control the type of inflation we are currently experiencing, and we hear from the fane-stream media that the Fed is "talking tough" which the markets translate into about two .25% rate hikes before yearend to a total of 2.5%.  This transpires as M3 continues to ride high at 17%.  Excuse us if we seem a bit skeptical that these miniscule rate hikes would do the slightest bit of good to quell inflation and support the dollar.  This is nothing short of surreal.  Of course, the Fed's and the government's lies have boxed them in.  How can you raise the Fed funds rate into double digits when you claim that official inflation is a little over 4%?  How would that be for racking up losses to your credibility?


Rate hikes could start off a new round of risk reassessment as inflation puts bonds and treasuries into negative rates of return and as rampant defaults across the board make bond investors gun-shy.  This could trigger a bear market in bonds that could take the whole system down as losses from eroding bond principal would reach levels of magnitude that would be irreparable regardless of what the Fed might do.  Even the Fed cannot resurrect the dead.  Theoretically, the entire banking system could be wiped out without a single bank remaining solvent, not even the Fed.  The entire financial world would become one giant bankruptcy court.  The Illuminists would be at all the auctions picking up all the choicest assets for pennies on the dollar, using the thousands of metric tonnes of gold and silver they have secretly hidden away offshore and in Switzerland to provide the necessary funds in the event the dollar completely collapsed.  Gold and silver would be somewhere in intergalactic space headed for the Einstein DeSitter radius at the outermost bounds of the visible universe.  The value of secret Illuminist gold and silver holdings might be valued in the tens of trillions as gold blew past the five figure boundary.  


You have to love watching market activity these days.  Every day we get another Hail Mary pass as the stock markets threaten to collapse.  The NFL should sign the PPT players on as clutch quarterbacks.  Note how on Monday, there was no change in the Dow after it was down most of the day.  Monday's close and this past Friday's close were within a fraction of a point from one another.  Then on Tuesday, as soon as the Dow went about 15 points past the previous recent closing low of 11,740.15 set on March 10, out came the anti-gravity machine to propel the Dow straight up almost 180 points in an hour and a half only to bomb 100 points near the end to close at 11,807.43.  Yet our Fed Head repeatedly tells us that the weasels who comprise the President's Working Group on Financial Markets (a/k/a the PPT) meet only occasionally for discussion purposes only.  Your nose is growing again, Pinocchio!


With the yen being relatively weak compared to recent highs and precious metals holding strong between 850 and 900, the cartel is boxed in.  If they strengthen the yen to hit precious metals, the stock markets will breach their recent lows and go down in flames like the Hindenberg into a bottomless pit.  If they weaken the yen even further to support the stock markets, the newly found liquidity will be plowed into precious metals as a hedge, as a safe-haven and as the only profitable market left on the face of the planet along with other industrial and agricultural commodities as hyperinflation destroys everything in its path worldwide, sucking economies around the globe past its event horizon and into its black hole singularity where nothing can escape its crushing gravitational pull.  Only gold and silver can survive the black hole.


The USDX had a similar experience to the Dow, as another miracle propelled the USDX leading contract (September) to 73.935, just short of 74, before it collapsed again to close at 73.60.  It has continued its descent in the early going on Wednesday, and is around 73.2 as of early Wednesday ahead of the FOMC meeting. This is exactly what happened in December open interest on the USDX dropped dramatically and as the dollar started a slow motion collapse to sub-71 from just under 78 over the course of 3 months.  There is not a single fundamental supporting the dollar unless you want to consider government intervention as a fundamental.


Ted Butler has come to the conclusion that the naked short-selling on the GLD and SLV ETF's is being used by the big COMEX players to support their shorts in gold and silver futures by suppressing precious metals prices without having to run up gold and silver prices by buying physical gold and silver (or by buying ETF shares the proceeds from which would then be used to purchase physical bullion) to cover their shorts. Such nefarious and totally illegal trading activities are the most rampant in the silver ETF due to worldwide silver shortages.  But we believe it goes much further than this.  The tip-off is the outrageously low lease rates, some of which for silver are even negative, meaning that you will be paid by the elitists to lease their silver.


Under IMF rules, which apply to the international banks acting as ETF custodians such as Barclays and HSBC, leased precious metals can still be carried on their books as if they still owned them outright even though such metals have been leased to another institutional investor.  No notation about the lease on its financial statements is required (there are new rules that would require such a notation, but the new rules are optional and few have opted to follow them).  This might hold true whether or not Barclay's or HSBC's bullion holdings as custodians are segregated from their regular bullion reserves, and it all boils down to the way they perform their accounting.  In general, no one audits the physical bullion reserves of these elitist banks to see if they are all accounted for or checks to see if reserves have been leased or otherwise encumbered.   They simply check to see if the paperwork inventorying the physical reserves in terms of number of ounces and serial numbers matches up with what is shown on the statements.  This failure to inspect, assay and audit physical reserves or to check for leases or other encumbrances on the bullion occurs either because such information is not required for financial statements or because the auditors look the other way when told to do so by the elitists.


So what could be happening here is that these ETF pools of gold and silver bullion might be leased out for next-to-nothing to the commercial gold and silver shorts on the COMEX to help them cover their shorts.  When gold and silver go on a tear, this leased bullion is then sold in large quantities, just enough to trigger the stops which have been set by the large specs, which the elitist-owned commercials know perfectly having all the inside information they want from our corrupt government which has the best regulators that money can buy.  When these sharp sell-offs occur, the commercials and market-makers often withhold their bids until the stops are triggered in order to minimize the amount of physical bullion that must be sold to trigger the stops.  This is why we keep seeing sharp sell-offs, in our opinion.


After the leased gold and silver has been sold rapidly and publicly, it could then be bought back slowly to keep the price from rising back to previous highs, and would then be returned to the ETF custodian pursuant to the lease and the serial numbers would be updated.  Or to keep the serial numbers the same and prevent a run-up in price, the commercials could publicly sell their leased bullion to a straw elitist buyer, and then buy back the same leased bullion in a private off-the-market sale from that same straw buyer.  Or it may well be that the bullion is still missing from the ETF, but that no one knows because it has not been properly audited.  Do you find these types of illegal dealings hard to believe?  Don't.  The players in the cartel are first order reprobates and sociopaths.  They are criminals and they think they are above the law because their Illuminist handlers own the courts.  Do not look at the world of gold, silver and commodities through rose-colored glasses, or you will have your derriere handed to you on a platter.


The banks on Wall Street and their international counterparts are arrogant, and they are liars.  The subprime debacle most certainly should clue you in on that much.  Without having a full, independent, audit and accounting, including the inventory and assaying of physical bullion, ETF investors have no way of knowing what the true ownership status is for the bullion that supposedly secures their ETF shares.  Otherwise, you are just taking the bank's word for it, and if so, may we suggest that to do so is very dangerous indeed.  Perhaps you'd prefer to compete with the auction rate bondholders as the dupes of the century?  They were told that their investment was AAA and as good as cash.  How would you like to be in their shoes?  Just keep pumping your money into the ETF's and you may soon join them.


These ETF's are a debacle waiting to happen, and in our opinion, you should shift your money out of them and use the proceeds to invest in physical gold and silver bullion or in gold and silver producer shares.  You should take physical possession of all bullion, or arrange to have your bullion put in a segregated account where it cannot be legally touched for manipulative purposes.  You should ask to see your physical bullion and inspect it yourself if you have someone else store it for you if that is possible.  Trust no one unless we tell you they are trustworthy.  Being informed about who you can trust is part of what you pay for when you become an IF subscriber.