International Forecaster Weekly

Crisis And Collapse Unfortunate but Inevitable

Fraud the cause of the credit crisis,  fraud stalls the recovery, Greece crisis spreads to Italy, Euro zone bound to failure, US debt rating to be revised, debt ceiling to be raised again, Municipal credit ratings also downgraded, harmony in the system is coming to an end soon.

Bob Chapman | July 16, 2011

As we have said for many years crime on Wall Street, in banking and in corporate America pays. One just neither admits or denies and lets the corporate shareholders pay the fines. These are today’s untouchable, who steal billions and get away with it. Financial institutions are too big to fail, as are their key employees. To a great extent fraud and other criminal behavior caused the credit crisis and lack of recovery that we have witnessed over the last 5 years. We have had top officers of firms see their companies headed for trouble and with this inside knowledge they have cashed out their share holdings. Then there were the predatory lenders, syndicators of bonds, which contained mortgages, now known as toxic waste, that were criminally given AAA ratings when they deserved BBB. We had some 1,000 corporate officers who backdated their options. Only one was criminally prosecuted when they all should have been. Prosecutions have come few and for between, because the SEC, CFTC and the Justice Department aid and abet these crooks in order to keep harmony in the system, which is coming unglued. They have always done this, but over the past 5 years even the uneducated can see what has and is taking place. In fact the more outrageous the crime, the less it is liable to be pursued. This non-pursuit of crime needless to say encourages more crime and further damages overall corporate and financial sectors. There is no accountability and we see none in the future. Let there be no mistake this financial crisis is worse than the last depression. This continuing degenerative process can only assist in a further degeneration of the system.

A bill has been introduced by Senator Carl Levin, chairman of the permanent subcommittee on investigations, that would change IRS regulations that allow American traders of credit default swaps to avoid paying federal taxes on transactions initiated in the US. It would tighten rules that enable some hedge funds and US corporations to reduce federal tax liabilities by declaring themselves foreign companies and moving a small part of their operations overseas. It would require companies to provide the SEC and the public, with a country-by-country breakdown of their sales, employment and operations.

Senator Levin says that abuse of offshore havens cost American taxpayers $100 billion a year. Presently American transnational conglomerates have more than $2 trillion stashed offshore waiting for another tax break like the one five years ago that allowed them to bring $350 billion home at 5-1/4% instead of regular taxation of 35%. That works out to about $600 billion lost to the Treasury. Gains from traders would be $20 billion over ten years. The removal of these tax breaks would certainly help cut the budget deficit.

The crisis in Greece is finally causing contagion in Italy. The crisis of all six near bankrupt euro nations is upon us and it is permanent. Moody’s just downgraded Ireland again, at the worst possible time. Spain, which is in terrible shape, will soon follow. The EU members and their controllers, the banks, keep trying to put band-aids on their festering problem. Sooner or later they will have to face the music and that is those six nations will all have to go bankrupt along with the banks. All of you subscribers in the EU and UK get your funds out of the bank, now, and into gold and silver coins. If you don’t you may end up with nothing. If this goes on long enough it will take the presently solvent nations down as well.

The European Union and the euro zone were ill conceived and bound to failure. After having lived in Europe for years, and being able to speak several of their languages, you get to understand people and the way they think. Both entities were anthropologically unnatural. Europe is still tribal. Just look at countries like Germany, France and Belgium where people speak different variations of the same language. In Belgium they speak two distinct languages. The EU’s major flaw was sovereign countries ran their own fiscal policies, as bureaucrats ran the EU. You have to either federalize all the way or forget it. The euro zone foisted one interest rate fits all, all on countries that should have never had the same interest rates as say Germany. We talked about both these issues 14 years ago, but as usual, no one was listening. From the very beginning the EU and the euro zone were doomed. Both are going to now begin the process of disintegration, as both are a failure. The six countries will go bankrupt, as will the banks. That will dislodge England and push it into bankruptcy and that in turn will force the US to follow. That may be the catalyst that forces a meeting of all nations to revalue, devalue and multilaterally default, hopefully such a meeting will occur long before this stage is reached. There is no question now that the game is over. The question now is when?

Workers have become a form of inventory just like widgets. For years now companies have laid off and rehired workers at will, keeping the expensive worker participation to a minimum. If you use total figures and include discouraged workers the unemployed are 20.6 million, up 483,000 in June. We do not see stimulus 3 coming from Congress, so we expect unemployment to resume its relentless rise upward from 22.6%. Mind you unemployment reflects $1.7 trillion in stimulus 1 and 2, and QE 1 and QE 2, which takes us well over 44 trillion. All those injections did was to bail out the financial sector and government. As we know our President tells us the administration created three million jobs, at a cost of $266,000 per job. That is hardly something to write home about. Corporate America is in excellent financial shape, but they will be slow to hire until they see a firm recovery in place. Sure GE made $17 million, because they did not pay taxes as we do, but they won’t rush out to hire unless the reason to hire exists. The real opportunity to hire has to be with small business that hires 70% of Americans. They do not enjoy the tax-free status of GE. Most of these small companies are barely hanging on. These are the companies that banks won’t loan too. Half of them are still experiencing falling profits, only 20% are doing well.

Year-on-year in the municipal sector 450,000 workers are going to lose their jobs, because many of these entities are close to broke. They and the states want more money from the federal government, which it doesn’t have to give. Large, very profitable businesses generally create very few jobs. They and mid-sized companies are buying more and more labor saving equipment, or they are moving production offshore. For the last three years most of the new jobs paid subsistence wages. Those are $8.00 to $11.00 an hour jobs, which are really part-time providing a 34.3-hour week, as inflation roars ahead up 10.6% and headed up to 14% by yearend. The average duration of unemployment is at an all-time high and 44% unemployed have been out work six months or more, at an all-time high.

We had a gentlemen call in on one of our programs, he has a masters and had been out of work for four years. He went to a company and told management he would work for nothing in order to learn to operate a forklift. After training he got a job doing that work at a plumbing company. He has the distinction of beating out 26 other applicants. He has been told in 1-1/2 years they will be an opening for him in accounting, his major. This is the state of America today, as our transnational conglomerates ship our jobs out of the country every day.

We figure a debt extension bill is on the way, but it will only cut $150 to $200 billion a year in government spending, hardly an accomplishment. If the Fed does not inject $850 billion into the economy we are looking at a minus 3% to 5% in GDP. That is in addition to buying $1.7 trillion in treasuries and other associated toxic waste.

The newest recession began a few months ago, or should we say downturn in an inflationary depression. There will be no recovery this year or next without $850 billion additional being thrown into the economy. No 3.5% growth. Perhaps a minus 4% if we are lucky. That should put unemployment close to 25% by 2012. After the news comes out that the term debt deal has been done the stock market will begin to slip downward.

As this transpires we see a million more foreclosures and more the following year. In order for the economy to revive housing it has to revive and we see absolutely no chance of that happening over the next two years. As the Fed supplies buckets of money and credit inflation will scream upward. 25% to 30% is already in the pipeline for next year via QE and Stimulus 2. There is no way that can be stopped. That will be added to by the results of QE 3 in 2013. We wish it won’t be this way, but it is.

There has been an inevitability since August 15,1971, that America and the western world would move from crisis to crisis until the financial and economic system eventually collapsed.

For those who have been objective over those years what we are seeing today is no surprise.

No one in America wants the merry-go-round to stop. Americans are not prepared to face the music. They naturally want more debt creation, but interestingly by 70%, they did not want a short-term debt extension. That is understandably confusing and the reason is that when it comes to economy and finance they are really in the dark. What they truly do not understand along with much of Wall Street is that the debt problem is much worse and deeper then they believe.

The problems in Europe are never ending. The solvent countries are discovering what we discovered a year ago May. The cost of the six-country bailout we projected at $4 trillion. A month ago we increased that to $4 to $6 trillion. When we said $4 trillion Germany said $1 trillion. This past week they said $3.5 trillion. We wonder why it took them so long to catch up. As of this writing the Greeks have signed a bailout deal but the lenders still do not know what they want to do. They are finally reaching the realization that they cannot be serviced never mind be repaid. You can cut wages and spending 40% or 50% and not expect revenues to fall. That means the bankers get paid and no one else does. That is what Wall Street’s game is all about. 

US consumer sentiment deteriorated in early July to the lowest level since March 2009 on increasing pessimism over falling income and rising unemployment, a survey released on Friday showed.

Confidence in government economic policies also curdled, the Thomson Reuters/University of Michigan survey showed. U.S. lawmakers are wrangling over a budget deal that would allow the government to raise the debt ceiling -- needed so the United States can fund its obligations next month.

The preliminary reading for the consumer sentiment index dropped to 63.8 in July from 71.5 the month before, falling far short of expectations of an increase to 72.5, according to a Reuters poll of economists.

The survey's barometer of current economic conditions fell to 76.3, the lowest since November 2009, from 82.0. The gauge of consumer expectations was also at its lowest since March 2009, tumbling to 55.8 from 64.8.

"Whenever the Expectations Index has been this low in the past, the economy has been in recession," survey director Richard Curtin said in a statement.

"Nonetheless, one month's data is insufficient to signal a renewed downturn, particularly if a last-minute agreement on the debt ceiling results in a partial restoration of confidence."

Overall, the data suggests real consumer spending in the second half of the year may be barely higher than the first half, the survey said.

The proportion of consumers that rated government economic policies as poor rose to 52 percent in early July, up from 40 percent in June.

The inflation outlook improved with the survey's one-year inflation expectation easing to 3.4 percent from 3.8. The five-to-10-year inflation outlook was at 2.8 percent from 3.0 percent.

The U.S. Federal Reserve's balance sheet grew to a record size in the week ended July 13 as the central bank bought more bonds in an attempt to support a fragile recovery, Fed data released on Thursday showed.

The central bank's $600 billion Treasury-buying scheme, known as QE2, ended on June 30. It now has to buy Treasuries under a program using the proceeds from maturing agency bonds and mortgage-backed securities.

The Fed's balance sheet -- a broad gauge of its lending to the financial system -- rose to $2.862 trillion in the week ended July 13 from $2.853 trillion in the week ended July 6.

Americans' access to basic needs, ranging from food and shelter to clean water and healthcare, has not significantly improved since the height of the recession, according to a Gallup study released on Friday.

The Basic Access Index, a 13-item measure of Americans' access to basic necessities, was at 82.0 in June, only slightly better than the low point of 81.5 recorded in February and March of 2009.

In June 2008, before the recession, the score was 83.6.

"The continued lack of recovery in the Basic Access Index metrics overall in 2011 shows that Americans are still lagging behind prior years in terms of their access to the basic necessities that foster a healthy, productive life," Dan Witters, a Gallup writer, said on its website.

The index is based on around 29,000 interviews conducted each month from January 2008 until June 2011.

The score's most recent movement is mainly due to large decreases in the percentage of adult Americans who have health insurance coverage, have a personal doctor, visited a dentist in the past year and have had enough money to buy food at all times in the last year.

There have also been small decreases in the percentage of Americans with enough money to provide adequate shelter.

Access to affordable fresh fruits and vegetables have made a significant 2.6 percent gain since June 2008. However, the 91.1 percentage is down from June 2010 when that rate was 92.8.

Federal officials have reached out to banks and investors to discuss the government's plans for its paying obligations after August 2 in the event the debt ceiling isn't raise, The Washington Post reports.

Among the options being considered to raise revenues while borrowing is prohibited, are the suspension of non-critical payments, and the sale of federally-owned student loans, mortgages, and even gold reserves.

The government is facing a $159 billion deficit in August, according to the Bipartisan Policy Center.

The Post is reporting that financial firms and investors were skeptical of the plans when briefed by Treasury Department officials, arguing there would be chaos in the markets due to speculators quick to scoop up valuable assets at low prices from a cash-starved government.

Rating agencies have said any partial default on its obligations, or steps to pay only some of the nation's bills could be met by a downgrade of federal debt — which would cause further economic turmoil.

 Moody’s Investors Service said Wednesday it has put the U.S. government’s top-notch credit rating on review for a possible downgrade because of the risk that Washington will not raise the federal debt ceiling in time to avoid a default.

The firm added that even a brief failure of the government to pay its bills would mean that the United States’s Aaa rating “would likely no longer be appropriate.”

During a press briefing Wednesday, White House Press Secretary Jay Carney says President Obama expects a compromise on the debt deal, similar to the Clinton-Dole era.


U.S. Representative Barney Frank, a Massachusetts Democrat, talks about negotiations between lawmakers to raise the U.S. debt ceiling. Frank also discusses Federal Reserve Chairman Ben S. Bernanke's testimony today before Congress. He speaks with Michael McKee on Bloomberg Television's "Fast Forward." (Source: Bloomberg)

The announcement comes after Standard & Poor’s, another of the major credit rating agencies, has said that it would dramatically downgrade the U.S. government’s credit rating if payments were missed.

The U.S. has long been able to borrow money cheaply because global investors believe the government can be counted on to repay its debts. If credit rating agencies downgrade the U.S. and investors lose their faith in the creditworthiness of the government, the cost of borrowing money — in other words, the interest rate — could rise.

President Barack Obama abruptly walked out of a stormy debt-limit meeting with congressional leaders Wednesday, a dramatic setback to the already shaky negotiations, according to GOP sources.

On a day when the Moody’s rating agency warned that American debt could be downgraded, the White House talks blew up amid a new round of sniping between Obama and Cantor, who are fast becoming bitter enemies.

Obama abruptly ended a tense budget meeting with Republican leaders by walking out of the room, a Republican aide familiar with the talks said.

The aide said the session was the most tense of the week as House of Representatives Speaker John Boehner, the top Republican in Congress, dismissed spending cuts offered by the White House as "gimmicks and accounting tricks."

JPMorgan Chase & Co. (JPM) Chief Executive Officer Jamie Dimon said clashes over faulty mortgages may drag on as investors and regulators demand compensation for soured loans issued at the peak of the housing market.

“There have been so many flaws in mortgages that it’s been an unmitigated disaster,” Dimon said during a conference call today. “We just really need to clean it up for the sake of everybody. And everybody is going to sue everybody else, and it’s going to go on for a long time.”

JPMorgan disclosed about $2.5 billion in second-quarter costs tied to faulty mortgages and foreclosures. The bank added $1.27 billion to litigation reserves, mostly for mortgage matters, and incurred $1 billion of expenses tied to foreclosures, according to a slide show accompanying today’s earnings report. Repurchase losses were $223 million, according to the company, which ranks second by assets among U.S. banks.

Banks are struggling to stanch losses tied to loans based on missing or wrong data about borrowers and properties and are facing probes of foreclosures that may have used falsified documents. Lenders led by Bank of America Corp. (BAC) have reimbursed investors for losses on mortgages, and New York-based JPMorgan said it has $3.3 billion in costs so far on repurchases from government-backed firms such as Fannie Mae.

JPMorgan’s additional litigation reserve may help cover “fees and assessments related to foreclosure delays and payments for other settlements,” including probes by the U.S. Department of Justice and the state attorneys general, the bank said. Litigation reserves also cover projected costs tied to so- called private-label mortgage bonds that may have contained faulty loans, the lender said.

“The private-label stuff will probably go up a little bit,” Dimon said when asked about future expenses to resolve disputes tied to the securities. “But I doubt it will go up more than the reserves we’re going to have to take down in the next 12 months.”

The litigation reserves aren’t earmarked for liabilities tied to Washington Mutual, the lender that JPMorgan acquired after it collapsed during the financial crisis in 2008. JPMorgan said those are the responsibility of the Federal Deposit Insurance Corp., adding that the “FDIC has contested this position.”

The outstanding balance of the Washington Mutual loans was approximately $70 billion as of March 31, with about $24 billion overdue by 60 days or more, according to JPMorgan’s first- quarter regulatory filing.

JPMorgan’s second-quarter net income climbed 13 percent to $5.43 billion as investment banking profit surged and more customers paid credit cards on time, the company said today. The lender advanced $1.08, or 2.7 percent, to $40.70 at 2:41 p.m. in New York Stock Exchange composite trading. The bank declined 6.6 percent this year through yesterday.

Central banks have bought more gold in the first half of this year than in all of 2010 as a long-anticipated reversal in so-called "official sector" sales gathers pace, a gold group reported on Thursday.

The World Gold Council provided no specific figures, but the rise will be little surprise after the so-called "official sector" became net buyers of bullion last year for the first time in two decades as a means to diversify their dollar holdings, a trend that has aided a long price rally.

"It was not a sudden shift. It was a trend that was gathering in pace as Europeans were starting to sell less and emerging markets and developing nations were starting to acquire more," Juan Carlos Artigas, WGC's investment research manager, said prior to the release of its quarterly Gold Investment Digest.

Mexico has led the charge this year in ramping up its gold reserves, buying over $4 billion of bullion in early May, while the International Monetary Fund has ended a one-year effort to sell down its stocks at the end of last year.

Global central banks as a whole bought 73 tonnes of gold in 2010, according to metals research firm GFMS Ltd, which has not released figures for this year. Net official-sector sales were 34 tonnes in 2009 and 235 tonnes in 2008.

Renewed central banks' interest in gold have powered the metal's record rally in the past few years, as lingering economic uncertainties and market stimulus by policymakers increased bullion's appeal as an alternative investment.

Central banks as a group became net buyers for the first time in the second quarter of 2008. On a yearly basis, official-sector buying swung to positive in 2010, the first time in more than two decades.

"In the same way, investors look to diversify their portfolios and find a way to manage risks effectively, gold has been one of the choices with central bankers especially in developing economies to create that balance," Artigas said.

Gold's average volatility was 13.4 percent for the second quarter, well below its long-term 20-year average of 15.8 percent, according to the WGC report.

WGC is a trade group funded by gold mining companies to spur bullion demand. It also sponsors SPDR Gold Trust , the world's largest gold-backed ETF which the group helped launch in 2004.

Artigas said that the positive trend of official-sector buying will likely continue in the near future.

"We believe that as a whole, central bank net buying is a result of the structural shift in reserve asset management," he said.


At least 7,000 top-rated municipal credits would have their ratings cut if the U.S. government loses its Aaa grade, Moody’s Investors Service said.

An “automatic” downgrade affecting $130 billion in municipal debt directly linked to the U.S. would occur if the federal level is reduced, Moody’s said yesterday in a report. Additionally, top-rated securities with no direct links to the national government will be reviewed for similar action.

Municipal debt including mortgage-backed bonds secured by the U.S. or agencies such as Fannie Mae and Freddie Mac, would be trimmed with the federal government, Moody’s said. It didn’t provide a total value for other state and local credits that may be affected, including housing authorities and nonprofits.

“Between now and the end of July, we’re going to evaluate all of those issuers using the same quantitative metrics that we have developed,” Naomi Richman, Moody’s managing director of public finance, said yesterday by telephone from New York about the indirectly linked securities.

“In the event that the U.S. government is downgraded, we won’t automatically downgrade those,” she said. “We’ll do a full review that we would normally do on a state rating.”

Moody’s put the U.S. rating under review as talks stalled in Washington on raising the government’s $14.3 trillion debt limit. Democrats including President Barack Obama want to raise taxes to curb the national deficit while congressional Republicans have sought deeper spending cuts.

The company rates 15 states at Aaa. It also gives top marks to 440 local governments, 100 state housing bond programs, 43 higher-education and nonprofit institutions, a like number of state revolving-fund bond programs, and the Tennessee Valley Authority and the Bonneville Power Administration.

Issuers that are partially dependent on the federal government, such as states receiving Medicaid matching funds, also will be reviewed for vulnerability. Medicaid is a health- care program for the poor that is jointly funded by the states and the U.S. Moody’s said Aaa-rated states on average rely on the federal government for a quarter of total spending.