International Forecaster Weekly

Damages Will Take Many Years To Mend

Poison from the top down, Fed is wrong to signal end of crisis, more negative surprises in the markets to come, Mortgage market upside down, major conflicts always a threat

Bob Chapman | May 14, 2008

I tremble for my country when I reflect that God is just; that his justice cannot sleep forever.
Thomas Jefferson (1743-1826), Third President of the United States

I sought for the greatness and genius of America in her commodious harbors and her ample rivers — and it was not there … in her fertile fields and boundless forests — and it was not there … in her rich mines and her vast world commerce — and it was not there … in her democratic Congress and her matchless Constitution — and it was not there. Not until I went into the churches of America and heard her pulpits flame with righteousness did I understand the secret of her genius and power. America is great because she is good, and if America ever ceases to be good, America will cease to be great.
Alexis De Tocqueville (1805-1859), French Lawyer, Political Thinker and Historian

Our country is a disgrace.  It has been poisoned from the top down by a cabal of men whose riches from the Industrial Revolution, coupled with old money from Europe, corrupted their souls until there was little more than a cesspool left within them.  As the poison has spread, the people of our nation have done precious little to stop its progress.  America has ceased to be good, and unless we change course immediately, by whatever means are necessary, America will cease to be great as predicted by De Tocqueville, and will come under the judgment of our Creator as predicted by Jefferson.  We are a hair's breadth from disaster, judgment and ignominy.  A vote for McCain, Obama or Clinton will most certainly put us over the edge, while a vote for Ron Paul would provide us with a change of course that could slingshot us back to greatness and into the good graces of our Creator.

The ongoing corruption of America started to accelerate with the concentration of vast sums of money into the hands of a few during the Industrial Revolution.  People like Rothschild, Warburg, Rhodes, Rockefeller, Carnegie, Morgan, Kennedy, Bush and Ford, some of whom many people still venerate, were some of the most evil men of the late nineteenth and early twentieth centuries.  They never gave a penny without an agenda, and did not have a single altruistic bone in their bodies.  That much money creates power, and, as Henry Kissinger once said:  power corrupts, and absolute power corrupts absolutely.  He should know.  The wealthy were lured into and became subservient to the powers of darkness through various satanic and occult cabals, many of which have been in existence in one form or another for thousands of years.  For most of these industrial pirates, this was a very small step since most of them were ruthless cutthroats to begin with.

The long line of exposure of debt problems by major and minor corporate entities has a long way to go. The signals by the Fed, Treasury and some corporate leaders that the credit crisis is over is very misleading, as we see one corporation after another declare some of their losses. From our vantage point we are nowhere out of the woods. The credit healing process can be accomplished by admitting the loss and writing them off and then rebuilding the balance sheet. Unfortunately this won’t be easy in a recession and some companies wont remain solvent. At the recent G7 meeting it was agreed that full disclosure in the financial world would be quickly forthcoming. We’ll believe it when we see it. After the tremendous losses by foreign professional investors one can understand why there is little confidence and trust left in the system.


We believe the financial sector will have many more negative surprises as time passes. The financial markets supposedly have discounted further adverse affects from the subprime/ALT-A fallout, but we think there will be more big surprises then they have planned for. This comfort zone is part of the reason the markets are trading as high as they are. We wonder if they have also discounted the next five years’ pending problems in Option ARMs, those pick-and-pay loans? Have they looked at the growing foreclosure rate in prime mortgages and are they expecting another 15% to 25% fall in home prices in the former 30 hot areas? We don’t think so. If markets believe the Fed will start tightening later this year they are mistaken. Real interest rates will rise, but not the Fed funds rate, nor the bank discount rate.


The shock to credit quality will take many years to mend. This isn’t just a mortgage crisis; it is a systemic crisis. These financiers have been looting the public for years and that game is over. The size of the problems will have a multiplier effect, which will change the credit markets for many years to come. One thing for sure is that losses in all financial spheres will be far greater than imagined. As far as housing is concerned inventories continue to build and will continue to do so as prices continue falling. We are talking of perhaps $2 trillion in losses. That is why official Fed interest rates won’t rise for at least two years. Real market rates may rise, but they are beyond the control of any one or group of central banks. In the last six weeks the tone of the market has improved, but we look at that slightly positive tone as transitory. The purge is on the way. The Fed is extending it, but they can only do their magic for so long. As we are seeing leveraged financial institutions are cutting down leverage and lenders are only lending when the credit is pristine and the profit is very large. This reduction of leverage and lending will unfortunately magnify the effect to the downside. Eventually market weakness will feed on itself. That has yet to happen, but it will happen. We have a large drop in asset prices ahead of us, particularly in real estate that will affect credit markets on an ongoing basis.


There is a lot more leverage in our housing market compared to prior housing downturns in the US and worldwide. On a comparative basis the leverage is about double most real estate markets since World War II. In the former 30 hot areas we see 40% of homes in negative equity; 1/3rd of all homeowners own their homes free and clear, thus 27% would have positive equity who have mortgages. That is $4.8 trillion mortgages upside down. That is beyond the $2 trillion in problems that already exist. If conditions deteriorate as much as we think they will the collapse in the US economy could be devastating.


12-3/8% inflation is reality and it will be 15% before the year is out. Finally the media is starting to pay attention, as is Congress. Year-on-year worldwide food prices are up 57%, rice is up 125% and wheat 65%. Oil prices have quadrupled since 9/11. At $125 a barrel the bill for Americans is $300 billion. OPEC will increase revenues by 1/3rd to close to $1 trillion. Inflation is the product of the Fed’s massive monetary aggregate creation and the wars and occupations in Iraq and Afghanistan. The falling dollar is a product of both. We believe that M3 creation has passed 18% over the past month with no let up or end in sight. What is really a frightening possibility is that our President may call for more ethanol to offset oil costs and imports. If that happens food prices would rise ever higher causing more inflation and death and starvation throughout the world. Already about 20% of our corn crop goes into ethanol and in the coming crop it’s supposed to be 30%, as Caligula and our corrupt Congress stands by and does nothing. Worse yet, corn plantings could be off as much as 10%. That increase in ethanol is not going to keep oil from going to $150.00 and gasoline from going to $5.00 a gallon. Our President’s answer is to continue to put oil into the Petroleum Reserve and beg Saudi Arabia for more production.


A subscriber in France recently reminded us that France’s Revolution was all about bread. If food prices continue to spiral upward assisted by energy prices we could have lynch mobs again out in force. You can only fool and lie to the public for so long and eventually they recognize how their President and Congress have corruptly deceived them. They, the Fed, the banks, Wall Street and corporate America will do anything to keep the Ponzi scheme alive. Were it not for foreign central banks buying Treasuries and Agencies, America would have long ago financially collapsed. In turn, the Fed buys any kind of toxic junk thrown its way. The investment climate in the US is so poor virtually no private foreign investment is entering the country. The weak dollar, real estate problems and an unresolved credit crisis doesn’t make investments very inviting.


The Fed tells us a net 55.4% of lenders tightened standards on commercial and industrial loans to large and mid-sized customers in the second quarter. That is up from 32.2% in the previous quarter and minus 3.7% yoy. In commercial real estate 78.6% tightened standards, in mortgages up from 52.9%. The Fed has tracked these numbers since 1991 and never previously has there been a reading over 32.7%.


In addition the percentage of lenders tightening standards on credit card loans rose to 32.4% from 9.7%, the highest since 1997. All other loans are 44.4% - the highest since data was collected in this category in 1996.


This is an aggressive withdrawal of lenders from lending. Next we will see a tightening in auto and other loans and credit cards. That classification increased by $15.3 billion in March. Consumers took out $34 billion in these loans during the first quarter, the most since 2001. That in part is because the house can no longer be used as an ATM card. Then of course there is rampant inflation.


We are looking for another increase in real interest rates led by the 10-year Treasury note currently around 3.85%. The next move will be to 4.50%. That would put the 30-year fixed rate mortgage at 6.70% and put jumbo loans at 7.65% to 9.65%. That should move us further into recession and send the stock market down. A few of you have been waiting for lower rates; we do not believe they are coming, so commit yourselves now if you have a resetting loan. Bondholders are losing money on official inflation rates. Based on our figures they are getting decimated. We saw a crack in the Fed’s defense regarding inflation last week when K. C. Fed President Thomas Hoenig said, “There is significant risk that higher inflation will become embedded in the economy and require significant monetary policy tightening to reduce it.” If the Fed did that we’d have instant depression. This is why the only bonds we recommend are Swiss franc government bonds.


Private investment firms have been amassing hundreds of apartment buildings with thousands of rent-regulated units across the City of New York have produced decidedly meager returns. What the investors are doing is harassing the tenants repeatedly for unpaid rent that landlords have already received; they are sent false rent bills, lease terminations and non-renewals and they have been accused of illegal sublets. This predatory equity is undermining affordable housing in NYC.


In the last four years these private equity firms have acquired 75,000 rental regulated apartments, or 6% of 1.2 million of such units. The idea is to get the rent over $2,000 a month, and the regulations no longer apply. About 50% of units in the boroughs are rent controlled.


Evidentially not ready to attack Iran the US and UK have opted for a softer target and perhaps a gateway to Iran. There is no question this latest Middle East crisis is being orchestrated in Lebanon. We also believe for reasons unknown to us that at the same time Lebanon is heating up and so is Georgia and Kosovo and it looks like the Illuminists are dumping the Clintons. It could be major conflicts are going to break out almost simultaneously to cover up the economic and financial collapse in the US, which will spread worldwide.