International Forecaster Weekly

Fed Wealth Grows While Others Drown In Debt

The Fed grows richer at our expense, Wikileaks news links, desperate things for desperate people, the clarion call of gold, black friday unremarkable, countries drown in the debt of other countries.

Bob Chapman | December 1, 2010

The Federal Reserve’s balance sheet grew a 4th straight week to $2,328 trillion, up $31 billion in a week. In May the balance sheet was $2,333 trillion.

Holdings of government securities totaled $901.24 billion, and rose $27.62 billion. Mortgage holdings were unchanged and Agency holdings fell slightly.

It might interest you to know that over the past seven years federal debt has doubled to almost $14 trillion. That is more than $100,000 for every American household.

It should be noted that combined expenditures on Social Security, Medicare and Medicaid are projected to account for 45% of primary federal spending. That is a rise equal to 62% of GDP to 185% in 2035. 70% of US Treasuries are held by private investors and once they start to realize the US is really broke the game is over.

On a European note, Germany cannot keep paying for bailouts without going bankrupt itself. Germany is drowning in the debt of other countries.

Assets under management in commodities hit a record high of $340 billion in October.

A very important event is that China and Russia are going to quit using the US dollar. This is big news. In spite of the current USDX dollar rally it will reduce demand for dollars and expedite the dollar’s demise. Once the dollar rally, induced by European problems is over, the dollar should take out 74 on the USDX. Current US insolvency is being ignored as the five-euro zone PIGGS get gored.

In addition, we wonder whether even the strongest country, Germany, can survive the onslaught of the 5 PIGGS and their financial problems. The Germany people are very upset that they have to bail out these Club Med countries. The US has the same problem with large liberal states with vast amounts of illegal aliens that are broke and will have to depend on the federal government for perpetual funding. Accompanying that funding will come further Federal control.

This presents two similar sets of circumstances. A breakup of the euro zone, which we have felt was inevitable since 1997, and a breakup of the unnatural alliance known as the European Union. In the US a similar set of circumstances could bring to the forefront the state sovereign movement. It will be interesting to see how both develop. It could well end up as everyman for themselves. Worldwide banks, individuals and corporations are insolvent in very large numbers. The banks, Wall Street and the City of London have been the root cause of these problems and by the countries bailing them out and transferring the debt to the taxpayer; they have in turn destroyed the value of their currencies versus gold. The problem is not currency versus fiat currency, but all currencies versus gold. The real exodus from currencies hasn’t even as yet begun because 95% of the world hasn’t discovered the problem as yet. Once the debt markets discover this the stampede will begin and not everyone will be able to get out the door at the same time – virtual chaos will ensue. The gold and silver markets are already telling you that. Those who act now can save their wealth, the rest, as we have seen in the past, will loose most everything. Next year worldwide more and more will join the flight to quality as prices soar. Confidence in all currencies will lessen as currencies head for a massive crackup. A compounding factor is that exchanges such as the LBMA in London and the Comex in NYC have sold scores more contracts in gold and silver than they can deliver. That will create a delivery crisis, not only for them, but also in the derivatives market as well. That could well destroy the Exchange Traded Funds GLD and SLV in a scenario when everyone loses their investments. The manipulation that has gone on in the gold and silver pits has been ongoing since August 1988, but now they make no effort to cover up what they are doing. It’s in your face and arrogant. There have not been free markets for many years, thanks to our government, the CFTC and the SEC as regulators for government and in behalf of government and those who control government. This is an absolute disgrace in a democracy. Obviously we no longer have a democracy or a republic, but in its place corporatist fascism.

Desperate people do desperate things and that goes for governments as well. Many governments are broke. We know about governments in Europe, known as the 5 PIGGS, then there are many in Eastern Europe, England and the US. They all are in desperate shape and that is why the US and the UK in particular are suppressing gold and silver. If they go up in value more and more people will realize something is terribly wrong. The lynchpin of the entire world financial system, the US, is broke and the US dollar is not worth the paper it is written on. The last time we looked at the forex holdings of all nations 59-1/2% was held in US dollars, which means when the dollar falls lower all nations are going to suffer. Those nations, individuals and corporations that figure out the truth through the smoke and mirrors can save what they have by dumping dollar for gold and silver. Once the panic begins it will be too late.

There have been statements as of late in reference to a gold standard from what we consider official sources. We believe the elitists realize that they cannot begin to consider a worldwide trading unit no matter what its form without gold backing. Countries are not going to allow themselves to get hung out to dry again, as they have been with a fiat dollar. We know most economists want the present system to continue, so they do not have to learn real economics. Even so-called conservative economists and analysts believe in the current system, which has been an abysmal failure. That has been borne out by two depressions and a population growth is no excuse for not using gold backing for currencies. It has little to do with central banks and governments creating money and credit. Gold production is falling not rising and adds only 1.5% to existing supply, making it rare and to be valued. The presence of gold backing helps demand for expansion. Keynesians always like to forget wars and the distortations they create, such as fiscal debt and expansion of the fractional banking system. Today we still have wars amidst a new declining world population; a sort of double whammy restricting the excuse for more money and credit.

The real problem is gold caps what central banks and banks can do. That limits leverage that is why the wealth accumulating elitists hate gold and besides gold’s upward movement tells us something is wrong within the system. Over and over again every time the system gets in trouble more money and credit is issued. That might for a time keep the system afloat but it also is debt creation, which in turn depreciates the dollar. It is impossible to separate debt and the affect it has on currency, as German Chancellor Ms. Merkel tried to do this past week. All she did was make a fool out of herself. One has to follow another. Each day credibility is strained and each day gold has another reason to rise. This is why gold-based accounts are starting to appear in Europe, mainly Austria, and under the circumstances that trend will grow as the flight to quality rises. Such responses are understandable as governments compete at destroying their currencies. Every time they want to depreciate the value of their currency, to create more of it, buy dollars thereby cheapening their currency, and use the result to purchase US dollar bonds in a US dollar that is also depreciating versus other currencies and in particular gold. Remember, all currencies have fallen versus gold for the past ten years. Thus, the rat race continues in the currency road to oblivion.

In the final analysis in a form of natural progression exporters may demand to be paid in gold, or a gold backed currency, or simply dump other currencies for their own currency, gold, commodities or something else physical. This is where all this is headed. We could also see, gold, silver and commodity bonds backed by physicals or the shares of producing companies. There will be gold and silver backed accounts, which have begun being offered in Austria. As long as fiat currencies continue to depreciate there will be a growing demand for such accounts, which at worst will maintain gold at some permanent level. The value of gold and silver will remain strong. Even gold backed debit cards could come into everyday use. It is absolutely essential that monetary policy include gold if confidence is to ever be restored in the minds of people worldwide. What one has to consider is that gold suppression doesn’t work and can’t work over long periods of time. There are those who believe that the re-adoption of gold will be a major addition. We believe it means major change. What economists and analysts fail to really understand is the history of money. It is not only gold backing for confidence, but the time, places and social and political implications. Keynesianism will soon be dead and with it a fiat world. Gold and its place in monetary and fiscal policy will reassert itself as it is again recognized as a reliable storage for value. Ascending gold will bring about problems for governments because for a world reserve currency like the dollar it would restrict seigniorage profits and the proliferation of money and credit. We have seen the re-ascendancy of gold over the past two years, and that is only the beginning for gold or gold backing to become universal.

What is worse for nations is to ignore gold’s clarion call. If they do not readopt gold into their currency reserves private systems will develop whether they like it or not. Deleveraging has begun and there will be no turning it back for banks. Banks and governments will be in serious trouble and many will go bankrupt. Beware, major changes and dislocations are on the way. If you don’t own gold and silver you are going to be in lots of trouble.

It seems that a number of prominent nations are having second thoughts about implementing a world government at this juncture. That distaste is reflected in their seeming opposition to the implementation of “quantitative easing two,” another injection of money and credit into the world financial system. They are calling for austerity and they know this will bring about deflationary depression.

The relative weakness of the US dollar, the euro and other currencies as well, has brought about great consternation and in the search for solutions gold is again being considered as a reserve for the dollar again, or for backing for a new international trading unit. We saw the trial balloon by World Bank President, Robert Zoellick, who told us in the pages of the Financial Times that, a new unit should be considered consisting of six major currencies backed by gold. Mr. Zoellick, is an ultimate insider, so what he has to say should be listened to very carefully. This is well put, a crimp in their control of the world financial system, but they can still control the system albeit in a more conservative way. Other commentators believe this sort of monetary arrangement is many years away; we believe it is closer than that. The US dollar has serious problems, as do most other currencies. In this regard the euro is a good example, as currency that could be on the verge of a breakup due to the financial state of 5 of its 16 members, which is front-page news around the clock. The present situation vis-à-vis the dollar and the euro was probably the last thing the insiders ever expected. It has pointed up the fact that a group of nations using one currency doesn’t work any better than one fiat currency. The gold backing on the euro was 15%, but over the past 10 years gold reserves have fallen precipitously as the ECB, the European Central Bank, joined the US Treasury and the Federal Reserve in their transparent attempt to suppress gold prices. That has left the ECB perhaps with a paltry 5% gold backing reflecting a stewardship of political and internationalist necessity. Like it or not the battle between the dollar and gold has been won by gold over the past two years, and at the highest elitist circles this is self-evident. The point is there are several major nations accumulating gold, which we pointed out in a previous issue, not only to dump depreciating dollars but also to put the only real money behind their currencies.

John Maynard Keynes, in order to justify his version of corporatist socialism, called gold a barbarous relic, which has led to the problems that we have today. In spite of the Keynesian economic approach we have had a second major depression in 80 years, not to mention the score of recessions in the interim.

A full body scanner operator was caught masturbating during a scanning session by airport staff late Tuesday.

Airport officials at Denver International airport were on high alert yesterday when a full body scanner operator was caught masturbating in his booth as a team of High School netball players went through the scanner.

"The young ladies were going through the scanner one by one, and every time one went through, this guys face was getting redder and redder. His hand was moving and then he started sweating. He was then seen doing his 'O' face. That's when the security dragged him out of his booth and cuffed him. He had his pants round his ankles and everybody was really disgusted," Jeb Rather, a passenger on a flight to New York told CBS news.

The controversial scanners display every minute detail of a person's body and have been called intrusive by privacy campaigners. Body scanners penetrate clothing to provide a highly detailed image so accurate that critics have likened it to a virtual porn shoot. Technologies vary, with millimeter wave systems capturing highly detailed pictures of genitals, and backscatter X-ray machines able to show precise anatomical detail. The U.S. government likes the idea because body scanners can detect concealed weapons better than traditional magnetometers.

"What do you want to do, get blown up by a goddamn Arab at 30,000 feet or we get to see your private parts? It's up to you, the ball's in your park," head of the TSA's scanning department, Rodney Schroeder, told CNN.

492: The number of days since the average borrower in foreclosure last made a mortgage payment.

Banks can’t foreclose fast enough to keep up with all the people defaulting on their mortgage loans. That’s a problem, because it could make stiffing the bank even more attractive to struggling borrowers.

In recent months, the number of borrowers entering severe delinquency meaning they missed their third monthly mortgage payment has been on the decline, falling to about 700,000 in October, according to mortgage-data provider LPS Applied Analytics. But it’s still more than double the number of foreclosure processes started.

As a result, banks are taking progressively longer to foreclose. The average borrower in the foreclosure process hadn’t made a payment in 492 days as of the end of October, according to LPS. That compares to 382 days a year ago and a low of 244 days in August 2007.

In other words, people who default on their mortgages can reasonably expect, on average, to stay in their homes rent-free more than 16 months. In some states such as New York and Florida, the number is closer to 20 months.

That’s a meaningful incentive, and it’s likely to grow unless banks manage to boost their throughput. Speeding up the process won’t be easy, as demonstrated by the banks’ continuing legal troubles related to robo-signers, bank employees who signed foreclosure affidavits without properly checking the required loan documentation.

Millions of Americans still are paying their mortgages even though they owe more than their homes are worth. The more banks’ backlog grows, the more likely they are to join it, adding to the already giant pile of foreclosures weighing on the housing market.

Barb Capa was at Saks Inc.’s flagship store in New York feeling flush and ready to buy.

“I just feel like spending more because of an increase in my salary,” the 22-year-old nurse from New York said yesterday. In 2009 Capa spent $1,000 during the holiday season. This year she is ready to “splurge” and drop five times as much on designer bags, clothes and shoes.

She’s not the only one. The average shopper spent 6.4 percent more than last year over the holiday weekend, the National Retail Federation said yesterday. Customers bought more non-essentials like jewelry and toys, signaling that the U.S. economy, propelled by consumer spending, is regaining strength.

“Consumers are more comfortable spending again, and that trend has held up,” Maggie Taylor, a vice president at Moody’s Investors Service in New York, said yesterday. “I don’t think people are as worried about losing their jobs anymore.”

U.S. retail sales during Thanksgiving weekend totaled $45 billion, the Washington-based NRF said in a statement, citing a survey conducted by BIGresearch. More people are scouring for deals earlier, with the number of customers shopping on Thanksgiving Day more than doubling over the past five years, the group said.

On Black Friday itself, so named because that’s when many retailers become profitable, traffic rose 2.2 percent, ShopperTrak said on Nov. 27. Retailers lured people into stores with promotions like Wal-Mart Stores Inc.’s $5 Barbie and J.C. Penney Co.’s $10 diamond-accented earrings. The Chicago-based consulting firm said sales rose 0.3 percent to $10.7 billion.

Mutual funds’ ties to so-called expert networks that have been probed as part of an insider trading investigation may undermine efforts by the industry to stem three years of client withdrawals from stock funds.

Janus Capital Group Inc. and Wellington Management Co. were among firms that received requests for information last week as part of an insider trading investigation involving hedge funds as well as mutual funds. None of the companies have been accused of wrongdoing.

The probe hits firms as they try to reverse $90 billion in withdrawals from U.S. stock funds since the beginning of 2009. Damage from the industry’s last run-in with regulators, a series of trading scandals in 2003 and 2004, took years to repair and led to more than $3 billion in fines against more than two dozen firms, including Bank of America Corp., Putnam Investments, Janus and MFS.

“There was reputational damage from that scandal that took a long time to heal,” said Burton Greenwald, a fund-company consultant based in Philadelphia. “In an industry that handles people’s money and savings, reputation is enormously important.”

Both MFS and Wellington were clients of Broadband Research LLC, a Portland, Oregon-based company that provides research to money managers and whose founder, John Kinnucan, was visited by federal officials as part of the probe. Affiliated Managers Group Inc.’s Friess Associates, and the Columbia Management unit now owned by Ameriprise Inc., have also been clients of the researcher, Kinnucan said in an interview. None of them have been accused of wrongdoing.

Shoppers crowded stores on Black Friday but spent just a little more than last year on the traditional start of the holiday shopping season, according to data released Saturday by a research firm.

Retail spending rose a slight 0.3 percent, to $10.69 billion, compared with $10.66 billion on the day after Thanksgiving last year, according to ShopperTrak.

Two factors behind the slim increase, a disappointment following bullish reports from stores Friday, were heavy discounts earlier in November and online shopping, which saw a big increase.

Chicago research firm Shoppertrak, which tallies sales in more than 70,000 retail outlets across the country, said the total was still a record for the day. It stood behind its prediction for spending to rise 3.2 percent for the season.

"It's hard to say Black Friday wasn't a success, it's just not the success we saw in the mid-2000s, when the day really became a phenomenon," ShopperTrak founder Bill Martin said. he slim sales increase came despite a 2.2 percent boost in store traffic, which Martin said suggests that consumers were in the stores searching for deals. "This means the American shopper has adapted to the economic climate over the last couple of years and is possibly spending more wisely as the holiday season begins," Martin said. ShopperTrak said spending for first two weeks of the month rose 6.1 percent over last year, as retailers promoted the sort of doorbuster deals that normally didn't appear until after the turkey dinner was finished. Traffic in stores the two weeks ended Nov. 13 jumped 6.2 percent. "Retailers were very conscious of driving traffic early in November and in doing so, some might have thinned Black Friday spending a bit," Martin said. "The reality is we have a deal-driven consumer in 2010 and that consumer responded to some of the earliest deep discounts we've even seen for the holidays."

Many retailers also offered those discounts and promotions on their websites. Online merchants saw a 16 percent revenue spike, according to research company Coremetrics. That increase came partly from shoppers who spent more per online purchase, the Web research company said. The average order rose to $190.80. That's a 12 percent increase over $170.19 on the same day last year.

The solid increase followed a 33 percent online spending spike on Thanksgiving Day.

"The season's off to a great start," said John Squire, Coremetrics vice president of strategy. "It really shows really strong consumer sentiment for buying and for going online." Meanwhile, PayPal reported an increase of about 27 percent in payment volume on Black Friday compared with last year. The eBay Inc. unit did not release a dollar amount for the sales it processed.

Lots of shoppers made it an all-nighter online. "Even at 1 a.m. Pacific, there was still very strong buying across the U.S.," Squire said.

Shopping on smart phones remained a small, though growing, piece of the pie. Coremetrics said about 5.6 percent of people logged onto a retailer's website using a mobile device. That compares with less than 1 percent on last year's Black Friday, Squire said. More dollars have shifted to online shopping over the years, but it's still a relatively small share of holiday spending, between 8 and 10 percent.

But many shoppers have become converted to the comfort and convenience of browsing the Web for gifts. Kelly Hager, 30, of Baltimore, Md., is shopping exclusively online for the fourth year in a row.

"It's nice to not have to fight for a parking spot and deal with 3 billion people who are all trying to get the same thing I'm trying to get," she said. Hager used to work at a mall, so she's seen Black Friday from both sides.

Retailers and analysts also were encouraged that people seemed to be buying more items for themselves, a sign they're feeling confident enough to spend more money overall. Thanksgiving weekend is prime time for retailers. In recent years, Black Friday called that because the surge of shoppers could take retailers into profitability, or "the black," for the year has been the busiest shopping day of the year, according to data from ShopperTrak.

Black Friday is generally not as big for online retailers as Monday after Thanksgiving, known as "Cyber Monday," which Coremetrics predicts will be the busiest online shopping day of the year, driven by heavy online promotions.

The Black Friday blitz doesn't make or break the holiday season. In fact, shoppers seem to be procrastinating more every year, giving retailers some tense moments the last few days before Christmas.

"I wait for the last minute," said Linda Majkowski of Queens, N.Y., who visited a Costco in Melville, N.Y. on Saturday, but said she hadn't started her holiday shopping yet. "I just found out what everybody wants on Thanksgiving."

AP Business Writers Mae Anderson and Michael Lee in New York and Jessica Mintz in Bellevue, Wash., contributed to this report.

Investors took almost $2.27 billion out of municipal-bond mutual funds in the week ended Nov. 24, according to Lipper FMI, a research company.

It was the second-straight outflow and followed a week in which investors withdrew more than $3.1 billion, the most since January 1992, according to Tom Roseen, senior analyst at Lipper in Denver. The most-recent data covers Nov. 18 through Nov. 24.

The latest withdrawals occurred as yields on longer- maturity tax-exempt securities headed for the biggest weekly drop since August, according to Bloomberg Valuation indexes. Yields on tax-exempt 30-year bonds fell almost 22 basis points to 4.32 percent on Nov. 24 from Nov. 18, the index shows. A basis point is 0.01 percentage point. Issuers who were rushing to sell taxable Build America Bonds, known as BABs, before the program is set to end next month spurred municipal supply to a record this month. Thirty- year tax-exempts sold off from Oct. 25 through Nov. 18, gaining about 77 basis points in yield, according to the Bloomberg Valuation index. Bond yields rise as prices fall.

A sweeping insider-trading investigation is raising questions about how hedge funds and other big investors dole out a common, and controversial, currency that flows freely across Wall Street. The currency is known as soft dollars.

Stock brokerages award soft dollars to investors much like an airline doles out frequent-flier miles, giving the most clout to the biggest traders. The clients then use the soft dollars in a variety of ways, but largely spend them on investment research.

Investigators now want to know whether brokerages and their clients may be abusing those otherwise legitimate soft-dollar funds, directing payments to so-called expert networks and other middlemen in search of inside information.

SAC Capital Advisors, a $12 billion hedge-fund firm run by Steven Cohen, told clients this past week that federal authorities appear focused on soft-dollar payments. SAC said it was basing that impression on a subpoena the firm received Monday afternoon, which it called "extraordinarily broad."

Federal criminal charges filed Wednesday against Don Ching Trang Chu, who worked for a California expert-network firm called Primary Global Research LLC, highlighted soft-dollar payments his firm earned for hooking up alleged tipsters with hedge-fund clients. On Wall Street, "soft dollar" can often be used as a verb. In one instance cited in the complaint, a hedge-fund manager who was cooperating with prosecutors said he wasn't able to "soft-dollar" a consultation session by sending trades to the firm's broker. When he offered to pay out of his pocket, the company told him not to worry about it.

A criminal complaint against Mr. Chu alleges that Primary Global clients paid for the firm's research in part by sending trading and the soft dollars that came along with it to Primary Global's broker-dealer arm.

To prove insider trading when information was passed from one person to another, prosecutors must show the tipper received a direct benefit, such as payment, or an intangible benefit for the nonpublic material. Tracking how those soft dollars were used would thus be an important element to a case, said Steve D. Feldman of law firm Herrick Feinstein LLP.

Mr. Feldman said that in certain cases, the use of soft dollars could show criminal intent if investment firms purposely obscured payments by routing them through their brokers rather than paying directly.

"It would be the kind of thing that's indicative of trying to hide the ball," Mr. Feldman said.

In 1998, the SEC estimated that more than $1 billion worth of third-party research was paid for each year by soft dollars. The boom in hedge funds and proprietary-trading operations since then fueled greater demand for research as more investors surfaced who were willing to pay big money for an information edge. Total soft-dollar funds are now estimated in the billions.

Gaining such an "edge" is the very basis of centuries of Wall Street behavior. This past week, as news of the insider-trading investigation intensified, many were left grappling with which of those practices might be attacked by prosecutors.

By focusing on insiders at big financial firms and corporations, and also little-known consultants who link them together, investigators are piecing together a web of relationships in an attempt to expose how suspicious trading frequently has gone undetected, the people say.

The probe has set off a wide-ranging debate about just what type of stock research might cross a line. For instance, one question is whether assembling disparate pieces of information in themselves not material gives some traders a potentially illegal advantage. The U.S. crackdown gathered steam quickly during the past week, as the Federal Bureau of Investigation raided offices of hedge funds controlling billions of dollars, and demanded trading records and other information from some of the biggest investment firms in the country.

The Manhattan U.S. Attorney's office has sent subpoenas to big hedge funds SAC Capital Advisors and Citadel LLC as well as mutual-fund firm Janus Capital Group Inc. and Wellington Management Co., one of the biggest U.S. institutional-investment companies. Investigators are seeking communications, trading records and other data as the probe widens, say people familiar with the matter. The firms either said they were cooperating or declined to comment. None of the companies is accused of wrongdoing.

Prosecutors also won a legal victory on Wednesday against a founder of the Galleon Group hedge fund, Raj Rajaratnam, gaining permission to use wiretaps against Wall Street investors in attempts to prosecute insider-trading.

In the month ahead, the government is expected to make new arrests, said people close to the case. While Mr. Chu is the only person who has been publicly charged, these people say, in recent weeks several hedge-fund traders and expert-network firm employees have been contacted by investigators and begun hiring criminal defense lawyers.

The investigation is building a picture of a vast "closed market in insider information," said Tamar Frankel, a Boston University law professor and expert in financial regulation. "It's a market of give-and-take: Today you gave, and tomorrow I give back.

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