International Forecaster Weekly

Follow The Economic Failures To Fix The Mess

More pressure on the dollar, weaker and weaker treasury auctions, large majority in favor of auditing the Fed, electric car from China to hit US next year, Wall Street resists increased transparency even now, Higher prices for oil eventually

Bob Chapman | August 1, 2009

On Wednesday the Treasury’s five-year auction yield was 2.69% with 21.15% allotted at the high and bid to cover was 1.92 to 1. The average of the past ten auctions has been 2.20%. Indirect, central bank participation was 35.7% versus an average of 36.8%. Overall that was weak demand. Do not forget the Treasury has to raise $2 trillion by 9/30/09.

The result of these mediocre to poor auctions has to be more pressure on the dollar, as budget deficits continue to widen.

Mortgage applications fell for the first time in four weeks, driven by a drop in demand for refinancing loans. Both purchase and refi loans fell 6.3%.

This is an early appraisal of the Chinese visit to Washington. There is no question the Chinese have the Illuminists stymied. The big question is has China demanded the rest of our high technology expertise that Bill Clinton was unable to deliver to them? Or have they pledged government properties to the Chinese?

Unadjusted yoy labor Department jobless claims are up 35%.

Commercial paper outstanding fell by $27.6 billion to $1.066 trillion outstanding from $1.093 trillion the prior week. In August it was $2.2 trillion. Asset backed CP outstanding rose $900 million to $437.8 billion, after falling $4.6 billion the prior week.

The Treasury’s borrowing needs have been exploding and the auctions are getting progressively weaker. This presents a serious problem for the dollar. Once 78 on the USDX is broken the index should freefall. We expect the government will staunchly defend 78, but will lose the battle probably in October or at least by the end of the year. As a result you will see more bonds being issued in foreign currencies such as the yen, yuan and euro bonds. Wal-Mart just issued $1 billion in Samarai bonds in yen. Issuance of foreign currency denominated bonds by corporations and eventually by the US Treasury will signal that the day of the dollar as the world’s reserve currency will be coming to an end. Lenders will want to get repaid in a currency they know will have future value. This kind of issuance puts more and more pressure on the dollar. Issuance of bonds in a foreign currency will be a clarion call that dollar hegemony is ending. The result will be other currencies will gain in strength versus the dollar, but the flip side is that they are all fiat currencies and all will fall versus gold.

As we view the sham hearings of the CFTC and position limits on oil in particular, we are reminded that the hearings are a political cover for higher prices. Constituents are complaining of higher gasoline prices and government is more than willing to respond. What the insiders behind the scenes want to do is suppress oil prices not only to assuage the citizens, but also to keep gold from rising as oil rises. Today suppressing oil prices is truly an awesome task given the composition of sources of supply and demand. Exploration is at a low and that can only eventually bring higher prices.

The unemployment rate climbed in all of the U.S.'s biggest urban areas during June, and 18 places had joblessness of at least 15%.

"For the sixth consecutive month, all 372 metropolitan areas had over-the-year unemployment rate increases," the Labor Department said in its report Wednesday.

The numbers in the department's Metropolitan Area Employment and Unemployment report are not seasonally adjusted.

The report said 144 metro areas reported jobless rates of at least 10%, up from six areas a year prior.

El Centro, Calif., had the largest jobless rate from June 2008, at 27.5%. Yuma, Ariz., was second with 23.1%. The lowest rate was in Bismarck, N.D., at 3.8%.

So much for the ongoing secrecy of the nation’s independent central banking system. A new Rasmussen Reports national telephone survey finds that 75% of Americans favor auditing the Federal Reserve and making the results available to the public.

Just nine percent (9%) of adults think that’s a bad idea and oppose it. Fifteen percent (15%) aren’t sure. Over half the members of the House now support a bill giving the Government Accounting Office, Congress’ investigative agency, the authorization to audit the books of the Federal Reserve Board.

Support for the bill has grown now that the Obama administration is proposing to give the Fed greater economic regulatory powers. The Fed, which sets U.S. monetary policy, was created as an independent agency to keep it free of politically-motivated interference.

The United States has signed an agreement to forgive nearly $30 million in Indonesian debt in return for the large Southeast Asian country agreeing to protect forests on Sumatra Island. The deal is the largest debt-for-nature swap the U.S. government has organized so far under the U.S. Tropical Forest Conservation Act and its first such deal with Indonesia - one of the fastest deforestation rates in the world. VOA reports:

A tree is felled in the forests of Indonesia. A country which loses an area the size of Switzerland each year to logging. Indonesia's massive deforestation rate makes it the world's third-largest emitter of carbon dioxide behind the United States and China. Deforestation also affects the country's wildlife. These forests are home to some of the world's most endangered species including endangered tigers, elephants, rhinos and orangutan. In a new deal, the U.S. has agreed to trade $30 million in debt repayments for increased conservation of their habitat.

Coda Automotive said former US Treasury Secretary Henry Paulson will serve as an adviser to the start-up electric-car maker on partnerships in China.

Paulson has "deep, personal relationships in China and unique insights into the country and its people," the Santa Monica, Calif.-based company said in a statement.

Coda also said Paulson invested in the company earlier this year, without giving details.

Coda plans to deliver its first model, a sedan, next year. The company, which began operating in June, intends to make and distribute electric vehicles and battery systems for transportation use.

Paulson, 63, was Treasury secretary under President George W. Bush, and his department in December allowed GM Corp. and Chrysler LLC to receive an initial $13.4 billion in funding from the Troubled Asset Relief Program.

General Electric Co., Harley-Davidson Inc. and manufacturers with finance businesses should be allowed to keep them under a revision of rules to govern banking, US Rep. Barney Frank (D-Mass.) said in an interview.

Companies that already have finance arms or industrial loan businesses known as ILCs can keep them without having to be subject to Federal Reserve oversight of their manufacturing operations, Frank said.

GE said it has been "very active" in opposing any rules that might force it to split off its GE Capital finance unit, which has $557 billion in assets.

Economic crisis, and a crisis for economics - Following its failure to fix the current mess, economics has tumbled into a full-blown existential crisis. The fall has been something to behold. Not so long ago, the discipline seemed omnipotent: if you wanted to fix anything from environmental ruin to welfare policy, there was only one solution: call in an economist.

But late last year, Alan Greenspan, the former Federal Reserve chief and high priest of capitalism, was forced to admit in a Congressional hearing that he had "found a flaw" in the foundations of his economic understanding. Nice euphemism. And at the weekend, a panel of leading economists wrote to the Queen trying to explain why they got it wrong. If there were such a thing as a car-crash letter, this was surely it.

The world's financial system lies in ruins, as do the fiscal balances of almost every major Western nation, after having to bail out their banks and splash billions of dollars of rescue money into the broader economy. Everyone is suffering, as unemployment climbs, house prices fall, and companies rack up losses or even face collapse. Yet the economists have still failed to find their form again.

At a time when the financial industry’s credibility is at an all-time low, you would think Wall Street’s finest would break their necks providing transparency.

Not so. Stock analysts continue to promote corporate earnings lies, insisting that net income isn’t really what investors need to know.

Instead, their earnings estimates ignore often huge expenditures that can’t help but affect a company’s health.

In mid-June, respondents were evenly divided when asked whether they thought Mr. Obama's health plan was a good or bad idea. In the new poll, conducted July 24-27, 42% called it a bad idea while 36% said it was a good idea. Among those with private insurance, the proportion calling the plan a bad idea rose to 47% from 37%.

Thomas V. Cash, a well-known fraud expert based in Miami, has stepped down from his job with consulting company Kroll Inc. amid the hubbub over his connection to accused Ponzi schemer R. Allen Stanford, sources told The Post.

A company spokesman confirmed that Cash left the company late last week, but declined to elaborate. Messages left at Cash's Fort Lauderdale, Fla., home weren't immediately returned.

A former high-ranking official with the Drug Enforcement Agency, Cash has been at the center of allegations that Kroll lost investors millions of dollars by serving conflicting masters.

Cash, based in Miami, gave investor clients the green light to invest with Stanford. However, he failed to disclose that the company, through Cash, had once been "hired and paid" to consult for Stanford, according to a lawsuit filed by Electri International, a foundation for electrical workers that lost $6.3 million with Stanford.

"Defendant Kroll never disclosed Mr. Cash's connection with Mr. Stanford and the obvious conflict that his relationship presented," according to the suit, which was filed in Florida state court.

Electri said it paid $15,000 to Kroll, which prides itself on being a private eye for businesses and investors, to conduct due diligence on Stanford and issue a report.

But among the red flags that Electri claims Kroll failed to mention was a $20,000 penalty levied against Stanford by the Financial Industry Regulatory Authority, the brokerage industry's self-policing group.

Electri also claims that Kroll's report also failed to mention a 2006 lawsuit filed by a former Stanford employee "alleging that Stanford ran a Ponzi scheme." Several arbitration claims against Stanford and one of his companies were also missing from the report, according to the complaint.

A recent profile of Cash on Kroll's Web site, which has since been removed, refers to the 68-year-old as "an expert in a variety of investigative and intelligence services." It also lists among his credentials that he's chairman of the Fraud Prevention Committee for the Florida International Bankers Association.

Indeed, Cash is so well connected in Florida crime-fighting circles that a judge assigned to the Electri case had to recuse himself because he "has been a personal friend" of Cash's "for many years."

Stanford, who was knighted in Antigua and is referred to as Sir Allen, is awaiting trial behind bars in Texas.

Manufacturing activity in the Federal Reserve Bank of Kansas City's district was largely flat in July, according to data released by the bank on Thursday.

The bank's production index moved to 2 in July from 9 in June and from -3 in May, in a month-over-month comparison. From a year ago, the July production index deteriorated to -50 from -44 in June.

The index covering production expectations six months from now fell to 10 in July after jumping to 13 in June from 1 in May.

Index readings below zero denote contraction and describe the breadth of the retreat.

The July employment index dropped, to -13 from -10 in June. In March, the employment index hit a historic low of -41. From a year ago, the index dropped to -57 from -54.

The prices paid index ticked up to -6 from -8, while the prices received index decreased to -17 in July from -14 in June. On a year-ago comparison, the prices paid index fell to -27 in July from -20 in June, and the prices received index worsened to -24 from -11.

The number of U.S. workers filing new claims for state jobless benefits rose last week, but they remain below peak levels reached in the spring.

Initial claims for jobless benefits rose by 25,000 to 584,000 on a seasonally adjusted basis in the week ended July 25, the Labor Department said in its weekly report Thursday. The four-week average of new claims, which aims to smooth volatility in the data, fell by 8,250 to 559,000, the lowest level since January 24.

The tally of continuing claims -- those drawn by workers for more than one week -- fell by 54,000 during the week ended July 18 to 6,197,000 the lowest level since April 11.