International Forecaster Weekly

Forward With Caution After Exposing The Fed

Currencies to continue to fall against gold, dollar rally unsustainable, Fed audit a good move, credit crisis for America and England, small gains in some places, plunges elsewhere, 

Bob Chapman | December 30, 2009

The rally in the dollar and the problems for other currencies prove what we have been saying and that is all currencies will continue to fall vs. gold. The impetus for the dollar rally originates as usual with the government and is added to by the disarray in the economies worldwide, particularly in Europe. One of the things central banks have never learned is that financial engineering only works for a short duration, after that the problem worsens. Even the world’s strongest currencies, the Swiss, Canadian, Aussie and Norwegian, are only holding their own versus gold. The reason why is almost all central banks have done the same thing and that is create money and credit recklessly at the behest of the US government. The US and British financial systems are insolvent. The euro is under severe pressure, because of problems in Greece, Spain, Ireland, Portugal and Italy, and every other central bank is jockeying for position via competitive devaluation. The public may not notice it but the situation is really chaotic. As you can see, the US is never allowed a level playing field, but that is part of what comes with being the international reserve currency. Banks in Britain, Europe and the US continue to take losses, sometimes-severe losses. There is no intermediation going on with the dollar. Its rally is founded on manipulation. We suspect in the future we will have an interesting phenomenon and that is a fall in the dollar, pound and the euro, as gold moves higher as the only viable alternative. The world is going to be shocked when the euro collapses. It won’t happen overnight. It will take a year or two, but it has a good chance of happening. The US dollar cannot and will not for some time to come be a safe haven for wealth. That is because the dollar and the US economy have been deliberately destroyed.

The flight into gold that we have seen has not been sparked by anticipation of inflation, but by a flight caused by a lack of confidence and trust in central banks. If other major governments have monetary problems they cannot be buyers of US Treasuries. They will have to be sellers of dollars. That will drive the dollar lower, further reduce the demand for US funding, force the Fed to further monetize and create more inflation. That in turn drive the dollar lower, but more importantly it will give gold a life of its own. We have found that this is something the public ad professionals refuse to accept. There is going to be a devaluation of the dollar no matter what people think, or want to think in their world of denial and fantasy. Other letter writers who disagree have recently attacked us. They can disagree and that is fine, but we might remind them that we are the ones who have been correct in our predictions 98% of the time, not them.

We believe the current dollar rally is unsustainable. If you remember we recommended a short on the dollar at 89.5 on the USDX. It fell to 74. We have just seen a two-week rally from 74 to 78 on very low volume. We had said the rally when it began at 74 could go to 78 to 80. Several more days of trading over the holidays could take it deep within that zone. This is just another rally conjured up by our government led by Goldman Sachs and JP Morgan Chase, which will be doomed to failure. The rally is aided by unsettled conditions in Dubai, Greece, Spain, etc., and the continued viability of the eurozone. In addition, the same groups of criminals have viciously attacked gold and silver in an attempt to take gold below $1,033 and silver below $17.00. That completes the circle of attack. The SEC and the CFTC simply look the other way aiding and abetting the criminals that run our government and markets from behind the scenes.

It is not surprising that 320 members of the House passed legislation to audit the Fed to find out where trillions of dollars have gone and what the Fed and the Treasury have done to manipulate markets. Just how much monetization is really going on? Has the Fed been buying more than half the Treasuries issued via stealth activity and how long will this continue? Will the Treasury default and officially devalue? Of course they will, it is only a question of time. What will the Fed do with bonds issued by agencies and toxic waste CDOs, and what did they pay for all this garbage? Have they been paying the banks, Wall Street and insurance companies 80% instead of 20% on the dollar, so that taxpayers can pay the bill and these entities, which are insolvent, can be kept functioning? Why is it we could forecast all these events and very few others could? It is because if they did they would be ostracized and they would lose their jobs. That is how systems like this always work. You cannot lay a normal yardstick to what we have seen and what will be an unprecedented future. When the dollar officially devalues in a year to a year and a half, the shock will shake America and the world to its very foundations.

An audit and investigation of the Fed is on the way and the American public is not going to like what they find. All the failures and criminal activity of the past 96 years will become reality. This coming year will see the Fed forced to monetize massive amounts of government paper, all of which will lead to massive inflation. Inflation will move up very quickly. The groundwork began last May and over the past two months we saw official inflation rise to 1.2% and then 2.4% as real inflation moved up over 8% again. Will we see something similar to what happened in Argentina, Zimbabwe or in the Weimer Republic We do not know. What we do know is it is not going to be good. All the telltale signs are being ignored and for such duplicity a high price will be paid. That is why we predict official devaluation and default. History is explicit; monetization cannot go on forever. Over the last two years the Fed has purchased trillions in what is essentially worthless paper from banks, Wall Street and insurance companies.

The rally in the dollar is transitory, because at the moment Europe’s problems seem greater than ours.

You have to ask yourself how does a stock market trade within 500 points for three months, when trading volume has fallen? There have been material withdrawals from mutual funds and 73% of trades are of the black box front running variety. The answer is the trading after hours, which has been dominated by your government’s plunge protection team. They cannot continue that indefinitely. There is lots of bad news coming in 2010.

The November medium home price rose 3.8% to $217,400, the highest level since May reflecting the $8,000 tax credit and growing inflation. Year-on-year prices fell 1.9%. The number of new homes on the market fell 235,000, the lowest since April 1971. There are now 7.9-months’ worth of homes for sale, up from 7.2% in October. What has to be added to that is discouraged sellers who have taken their homes off the market, and lenders that have been withholding inventory for sale - a bottoming market is years away.

Loan demand fell 5% last month. Mortgage applications fell 10.7%, the lowest level in two months. Refi loans fell 10.1% and mortgages fell 11.6%.

This as foreclosures topped one million. As a result home construction has fallen 83% from its peak. We projected 75% in June of 2005. The decline in building is probably bottoming, but with the inventory overhand it could be many years until we could see a recovery.

Durable goods orders rise of 0.2% were very disappointing. The experts expected a rise of 0.5%. Wrong as usual.

For the week ended 12/23 the commercial paper market rose $9.3 billion to $1.160 trillion, still a ghost of its former self.

Congress, the SEC and FINRA are investigating Goldman Sachs and others in the use of synthetic CDOs, collateralized debt obligations, that we have been hammering for since 2006. Not only were the laws of fair dealing violated, but they were shorting the deals they sold to clients, which they knew had to fall in value, because the ratings they arranged with the raters, S&P, Moody’s and Fitch, were phony from the outset. Yet if you notice there hasn’t been a lawsuit, civil investigation, or criminal charges. The exposure of this activity allowed the banks to profit from the housing collapse, which they deliberately created. Again, another fine and no criminals go to jail. They simply own Washington.

The 10-year T-note yield just rose from 3.20% over the past 18 business days to 3.80%. Look at a chart and it is ominous. The yield is on long-term trend lines that go back to June 2007. It looks like that line could be broken to the downside. The chart is very jagged giving it all the earmarks of manipulation. Our guess is that something happened three weeks ago that we don’t yet understand, but whatever it was foreigners are running away from US sovereign debt, just as we forecast they would. This means the fed could be taking down more than 60% of the auctions of US debt, which means more monetization and more inflation. If the Fed does not continue buying, by creating money out of thin air, support will be broken and yields could quickly move up to 5%, which would further destroy the retail housing market. Such a move would send gold to $1,550 to $1,650. Incidentally, over the past 50 years we have observed that as interest rates rise so does gold and silver, up to a certain point. In this case bank discount rates could move from zero to 5% and gold would rise. After that gold becomes the only vehicle that preserves assets.

America and England are facing a credit crisis again, as interest rates rise and the Fed feebly attempts to remove quantitative easing, and beginning by withdrawing funds from its various programs. Rating services tell us that if the Fed does not do so the US and UK credit ratings will be lowered. These funds put into the system by the Fed and the Treasury aggregate about $12.7 trillion. We might add the US and the UK are not the only countries enveloped in this situation. We have seen the US ten-year Treasury note yield move from 3.20% to 3.80%. This is the markets way of telling the Fed and the Treasury, that if you continue to do what you have been doing then you will have to pay more interest to do so. Those 10s could easily move to yield 5% in this coming year, putting the 30-year fixed rate mortgage over 6%. That in finality puts the last nail in the coffin of the residential housing market. At the same time since last May inflation has been building and now is at an official 2.4% and unofficially 8-1/4%. The Fed and other major nations are now attempting to hold up the dollar, it having rallied just recently from 74 to 78 on the USDX. Aligned against these nations are a group of commercial currency market makers, who are shorting the dollar in response to its phony rally. The pros will win and the governments will lose. That is a $4.3 trillion a day market of which $2.5 trillion trades in dollars. Not even Superman can control that massive amount of money. Due to the Treasury’s profligacy the Fed we suspect has already bought more than $600 billion in Treasuries; $300 billion that they admit too and $300 billion or more they refuse to tell you about. That is why we need an audit of the Fed.

The Fed, the Bank of England, and others will not be able to ease funds out of the system without allowing deflationary forces to take over. The result will be a downgrade, a run on the dollar and official devaluation and default within the next 1-1/2 years. There is no other way out, as other nations are forced to do the same thing, leaving the only safe haven of wealth preservation in gold and silver related assets. Nothing will compare. All world currencies will fall versus gold. In the meantime, the wages of easing and the inability to withdraw these funds, will lead to a period of inflation if not hyperinflation beginning with a real 14% plus in 2010. After that it is anyone’s guess where inflation will be headed.

The present administration is headed in the wrong direction on everything, particularly on spending. Their actions have resulted in short-term bills yielding from zero to .65%, hardly an incentive to own such debt, as the Fed must issue and or roll this debt daily. A bogus temporarily strong dollar supplies a lift and respite for treasury debt for which the only solution is higher rates that are already being anticipated. Some have seen our ideas on this issue as faulty, all we can say is we are the ones with the 98% track record.

An index of home prices in 20 U.S. cities rose in October for a fifth consecutive month, putting the housing market and economy farther down the path to recovery.

The S&P/Case-Shiller home-price index increased 0.4 percent from the prior month on a seasonally adjusted basis, after a 0.2 percent rise in September, the group said today in New York. The gauge was down 7.3 percent from October 2008, the smallest year-over-year decline since October 2007. The median forecast of economists surveyed by Bloomberg News anticipated a 7.2 percent drop.

If Morgan Stanley is right, the best sale of U.S. Treasuries for 2010 may be the short sale.

Yields on benchmark 10-year notes will climb about 40 percent to 5.5 percent, the biggest annual increase since 1999, according to David Greenlaw, chief fixed-income economist at Morgan Stanley in New York. The surge will push interest rates on 30-year fixed mortgages to 7.5 percent to 8 percent, almost the highest in a decade, Greenlaw said.

Investors are demanding higher returns on government debt, boosting rates this month by the most since January, on concern President Barack Obama’s attempt to revive economic growth with record spending will keep the deficit at $1 trillion. Rising borrowing costs risk jeopardizing a recovery from a plunge in the residential mortgage market that led to the worst global recession in six decades.

“When you take these kinds of aggressive policy actions to prevent a depression, you have to clean up after yourself,” Greenlaw said in a telephone interview. “Market signals will ultimately spur some policy action but I’m not naive enough to think it will be a very pleasant environment.”

Yields on the 3.375 percent notes maturing in November 2019 climbed 4 basis points to 3.84 percent at 11 a.m. in London today, according to BGCantor Market Data. The price fell 10/32 to 96 5/32. They have risen 65 basis points this month, the most since April 2004, as government efforts to unfreeze global credit markets lessened the appeal of the securities as a haven.

Personal incomes rose in November at the fastest pace in six months while spending posted a second straight increase, raising hopes that that the recovery from the nation's deep recession might be gaining momentum. [It also should be noted that inflation rose 2.4% on an annualized basis as well, and these are official figures.]

The Commerce Department says personal incomes were up 0.4 percent in November, helped by a $16.1 billion increase in wages and salaries, reflecting the drop in unemployment that occurred last month.

The gain in incomes helped bolster spending, which rose 0.5 percent in November. Both the income and spending gains were slightly less than economists had expected.

Want to keep IRS auditors away? Keep your earnings under $200,000 and they won't bother you 99 percent of the time.

IRS enforcement numbers, released Tuesday, show that returns under that amount have a 1 percent chance of getting audited.

Returns showing income of $200,000 and above have a nearly 3 percent audit chance. The percentage jumps to more than 6 percent for returns showing earnings of $1 million or more.

New-home sales plunged to their lowest in seven months during November, a bigger-than-expected drop that might have been caused by uncertainty over a government tax incentive.

Sales of single-family homes decreased 11.3% to a seasonally adjusted annual rate of 355,000, the Commerce Department said Wednesday.

The level was the lowest since 345,000 in April. The plunge wiped out much of the gain made in the new-home market since the January bottom.

Economists surveyed by Dow Jones Newswires estimated a 1.2% drop to a 425,000 annual rate for November.

New-home sales, unlike sales of existing homes, are recorded with the signing of a sales contract and not the closing. A big tax credit for first time buyers was due to expire at the end of November and caused concern in the housing sector. It was extended in November by Congress to next spring.

Another reason for the big drop in new-home sales could be strong demand for used homes. Data this week showed existing-home sales are up more than 40% since the end of last year, with many purchases made for foreclosed property carrying a discounted price tag.

Wednesday's report said new-home sales in October rose 1.8% to 400,000, revised from an originally reported 6.2% increase to 430,000.

Year over year, sales were down 9% since November 2008.

The median price for a new home dropped in November - but not by much. It was down 1.9% to $217,400 from $221,600 in November 2008.

Inventories shrank. There were an estimated 235,000 homes for sale at the end of November. That represented a 7.9 months' supply at the current sales rate. An estimated 240,000 homes were for sale at the end of November, a 7.2 months' inventory.

Commerce's report Wednesday showed November new-home sales fell in three of four regions in the U.S.

US consumers are increasingly confident about the economy, according to the most recent Reuters/University of Michigan Consumer Sentiment Index, which gave a score of 72.5 for the month of December, up from 67.4 in November. 

The preliminary mid-month index had registered a slightly higher score of 73.4, but the end-of-the-month result shows a continuing upward swing in consumer confidence since October.

US MBA Mortgage Applications declined by 10.7% on December 18 week.

U.S. overall consumer confidence improved last week to match its best level of the year, according to an ABC News poll released Tuesday.

The consumer comfort index rose three points to -42 in the week ended Dec. 20.

Still, according to the survey, just 7% of respondents expressed confidence in the economy, the same as last week. But 50% of those polled said their own finances were in good standing, up from 47% the prior week. In assessing the buying climate, 30% of respondents said it was good, up from 29% the week before.