International Forecaster Weekly

Gold Silver And Commodities Likely Safer

Oil can burn us badly, no wealth creation, not a good time to raise taxes, the time is now to discuss the antidote, Senate gridlock ahead, bears making lemons out of lemonade. Social Security adjustment in the mail.

Bob Chapman | November 17, 2010

We hear stories about oil and about how it will probably move higher, perhaps to $150.00 a barrel and perhaps higher. This is the first time in more than three years that it has moved to lofty levels. The net speculative long position is more than 200,000 contracts, or about 35% higher than in 2007. Some economies are doing well, particularly in Asia and in Latin America, but not enough to create such higher prices. $60.00 a barrel would more nearly meet demand. As is being experience by the entire commodity sector prices reflect the tremendous fear about money and credit unleashed over the past eight years, particularly over the past 2 years under QE1. That has produced unusual profits for commodity producers, as well as base and precious metals producers. This in turn will lead to higher wholesale prices for goods and part of that will spread to services as well. That in turn will force manufactures and others to raise prices, which will cut revenues and to some extent profits. If not passed on to consumers’ profits could fall more dramatically.

There is no doubt higher oil prices are going to increase costs for all sectors of the economy and negatively affect earnings. If that is going to be the case growth for the current year has to be negatively affected. That means higher unemployment already having been experienced in excess of 22% for months. Do not forget a few years ago that sales were double what they are today and unemployment was more or less half of what it is today. Thus, we enter this new economic region about 50% worse off than we were three years ago. Official inflation is slightly lower today, but real inflation is considerably higher at 6-1/2% to 7%. Capacity utilization is 10% lower as is consumer confidence. These facts certainly do not instill confidence in the present and in the future. As this round of QE2 gets underway we are certainly starting from a much lower base.

Needless to say, any writer in print, on radio or TV, or on the Internet presenting such heretical views is immediately shut down. That happened recently when we mentioned that another false flag event was being planned by the White House to garner sympathy and prestige for a failed president. His own staff made the admission.

Most companies have laid off as many workers as they dare too and will lay off more as revenues continue to fall. Investors believe that $600 billions in QE2 will make things lots better. The economy, again, is not being targeted. What is being targeted again is the financial sector, particularly the stock market. Those who own the Fed and those within that system must be saved. The market has to be saved because if it is not the last vestiges of personal wealth will disappear. If that happens the middle class and retirees will go ballistic and into panic.

QE1 brought 5 quarters of about 3% growth, which was half gleaned from the effects of stimulus and Fed intervention that cost $2.5 trillion.

QE2 will need an equal amount if not more. This is not wealth creation that we saw over the past 30 years. This is a rear-guard action in an attempt to save a dying system based on Keynesian economics, which is nothing less than a plan for corporatist fascist government. Totally monetizing government debt is not the answer and that in part is what this is all about. It is feel good psychology for the public with some other goodies thrown in for good measure, such as a couple of new inexpensive government programs thrown in for $100 billion or so, an extension of unemployment benefits and a continuation of the Bush tax cuts. They will increase the public’s comfort zone and keep the unemployed at bay – at least for now. The stock market the Fed is trying to save is rife with corruption, so much so that investors are leaving in droves. As a price for keeping the market going at a high level the SEC and CFTC turn a blind eye to blatant wrong doing in the form of naked shorting and flash trading, which is front running. These criminals are being allowed to run loose in our markets, particularly hedge funds. We see complaint after complaint after complaint in the thousands totally ignored and if you challenge either agency your problem gets worse. We have seen it first hand, and there is no longer anyone there to defend and protect you. How can investors risk their funds in such an environment, run by a criminal syndicate? Don’t forget we spent 28 years on Wall Street, so we know what they are up too and what we are dealing with.

There are the issues of higher taxes and fiscal spending cuts. The higher taxes are the wrong thing at the wrong time unless you intend to collapse the system. If taxes are to be raised they have to be raised slowly in order to not abruptly cut off consumption, which is the lifeblood of the system. The same is true of deficit spending cuts. Sharp cuts like sharply rising taxes would simply bring the system down. Slower changes would leave us with 10 to 20 years of stagnation in the absence of war. The plug should have been pulled three years ago to purge the system, but the elitists who created this disaster, were not ready just yet to do so.

The overhanging problems we have just discussed lead us to the antidote. Those with foresight who understand the problems are headed for safety, a flight to quality. That historical investment venue includes gold, silver and commodities. Conservative analysts and economists are thinking in terms of $3,000 gold, and $100 silver and a CRB of 400. Why shouldn’t they? Official inflation since 1980 would reflect gold at $2,400. Real inflation based on 1980s formula would mean gold should be selling at $7,700 an ounce. That is quite a difference, but it is realistic and who knows how excessive the market might become. Considering the criminality in Wall Street and banking today the public sees very little integrity left. When confronted with the facts concerning the economy, financial sector, and their lack of success, except for themselves, they become downright hostile when confronted with the facts. Their whole way of life, their entire system of being, is being sucked out from underneath them. Unfortunately there is no faith and integrity left in the global financial system. Ultimately, if the late 70s and early 80s are any guidelines only 15% of investors will protect their wealth and profit from what is destined to happen. Be advised, if you are not already in gold, silver and commodities you had best get there soon.

In the coming two years the House and Senate will be frozen in gridlock. The democrats in defeat are hostile having only had a glimpse of success and are completely estranged from Republicans. This is due to their roughshod tactics of the past two years. There are few bridges, almost all have been burned. We see few chances at compromise.

The Fed, and the administration, had best do something constructive fast, because deterioration is upon us and once it gets going it will be very hard to stop. Inflation could lead to hyperinflation and then to deflationary depression. A fact that is really disconcerting is that half of investors are bullish on the economy and the market. The question is how long will QE2 last this time, and how much has already been discounted? Leading indicators are weak, so we see investors basing decisions quickly on the affects of QE2, which is not viable long term. Confidence otherwise is not evident and employment has declined in the past quarter as layoffs continue. Job openings are three times worse, which portends poorly for the future.

We still have a raging deficit, even though the past month was a little better. These facts are not a prescription for success. You had best be very careful – we live in treacherous times.

This past week the Dow fell 2.2%, S&P 2.2%, the Russell 2000 2.4% and the Nasdaq 100 2.2%. Banks fell 3.3%; cyclicals 2.4%; transports 2.4%; consumers 2.3%; utilities 2.5%; high tech 2.2%; semis 2.4%; Internets 2.1% and biotechs 1.3%. Gold bullion fell $25.00, the HUI added 0.4% and the USDX rose 2% to 78.11.

Two-year Treasury bills rose 13 bps to 0.50%, the 10-year notes rose 25 bps to 2.79% and the 10-year German bunds rose 9 bps to 2.51%.

Freddie Mac 30-year fixed rate mortgages fell 7 bps to a record low of 4.17%; the 15’s fell 6 bps to 3.57%; the one-year ARMs were unchanged at 3.26% and the 30-year jumbos rose 5 bps to 5.16%.

Fed credit expanded $8.4 billion, up 3.6% YTD, or 8.2% YOY, or $69.3 billion and $173.5 billion respectively. Fed foreign holdings of Treasury, Agency debt surged $20.4 billion, a 22-week gain of $260 billion to a new record $3.336 trillion. Custody holdings for foreign central banks increased $380.7 billion YTD, or 14.9% annualized. The YOY rise is $419 billion, or 14.4%.

M2 narrow money supply jumped $22.4 billion to $8.786 trillion, up 3.5% YTD, YOY it is up 3.2%.

Total money market fund assets increased $2 billion to $2.802 trillion. YTD assets have fallen $492 billion and YOY $533 billion or 16%.

With no quick fix in sight for the crisis in U.S. mortgage servicing, the outlook for foreclosures remains "grim" for the next couple of years, newly appointed Federal Reserve Governor Sarah Bloom Raskin said.

"I believe that serious and sustained reform is needed to address the larger problems in mortgage servicing," Raskin said on Friday in remarks prepared for a National Consumer Law Center conference, her first public comments since confirmed to her post by the U.S. Senate in late September.

"Too many accounts of shoddy operating procedures -- lost paperwork, slow response times, and sloppy record keeping -- cast a dark shadow on this part of the industry that links mortgage borrowers and lenders," she added.

In strongly worded remarks, the former bank regulator from Maryland said the problem of "robo-signers" in mortgage servicing "shone a harsh spotlight on other long-standing procedural flaws" in the mortgage servicing industry.

"Many may view these procedural flaws as trivial, technical or inconsequential, but I consider them to be part of a deeper, systemic problem and am gravely concerned," she said.

U.S. mortgage foreclosures could be about 2.25 million in 2010 and the same number in 2011, followed by about 2 million in 2012, Raskin said.

A new pricing survey of products sold at the world’s largest retailer [WMT 54.13 -0.21 (-0.39%)] showed a 0.6 percent price increase in just the last two months, according to MKM Partners. At that rate, prices would be close to four percent higher a year from now, double the Fed’s mandate. The "inaugural price survey shows a small, but meaningful increase on an 86-item grocery basket," said Patrick McKeever, MKM Partners analyst, in a note. Most of the items McKeever chose to track were every day items like food and detergent and made by national brands.


Bush told British officials in the heat of the 2008 presidential election, “I’d have endorsed Obama if they’d asked me,” according to a November 9 blog entry by Financial Times of London correspondent Alex Barker. The Financial Times is the chief British financial newspaper, a newspaper that corresponds roughly to the New York-based Wall Street Journal.

Barker observed that his two sources for the quote note that Bush had been asked by British officials in a private meeting that included British Prime Minister Harold Brown what Bush thought of McCain and the U.S. presidential election. According to Barker, his two sources said Bush responded:

“I probably won’t even vote for the guy,” Bush told the group, according to two people present. “I had to endorse him. But I’d have endorsed Obama if they’d asked me.”

Barker exclaimed: “Endorse Obama? Cue dumbfounded look from British officials, followed by some awkward remarks about the Washington weather. Even Gordon Brown’s poker face gave way to a flash of astonishment.” Barker added that his two eyewitnesses to the meeting have continued to wow friends at dinners in London society. “Some of the witnesses still dine out on it,” he wrote.

The quote goes a long way toward demonstrating the lack of difference between the ideology of the leadership of the two major political parties in America. Indeed, President Obama has only continued and expanded the bailouts, “stimulus” spending increases, and deficit culture that Bush encouraged during his presidency.

 Democrats in the House of Representatives averted a messy leadership struggle Friday night, clearing the way for Speaker Nancy Pelosi to remain leader and preventing a battle between other leaders as the party becomes the minority. Rep. Steny Hoyer will become second in command of their new minority without a challenge from Rep. James Clyburn.

Under an arrangement worked out in private, officials said Clyburn would instead receive a new position, title unknown and duties undescribed, explicitly labeled the third-ranking post in leadership.

The maneuvering was described by Democratic officials after issued a vaguely worded statement saying she intends to nominate Clyburn to a new No. 3 post. The statement made no mention of Hoyer, and officials who filled in the details did so on condition of anonymity, saying they were not permitted to speak publicly about the matter.

Pelosi is assured of remaining Democratic party leader when the new Congress convenes in January under a Republican majority. She has drawn no opposition for the post even though several members of the rank and file have said they would prefer she step aside after historic election losses. The Republicans gained at least 60 seats in midterm elections, more than enough to return to power after a four-year absence.

A race between Hoyer and Clyburn for the post of party whip took shape in the days following the election and quickly took on racial overtones. Clyburn is the most powerful African-American in Congress, and he drew a formal endorsement from the Congressional Black Caucus. But he failed to generate enough additional support to overcome Hoyer's strength among liberals and conservatives alike, and it appeared his only options were to run against Hoyer and lose or else concede the obvious and step aside.

"Over the past four years, Congressman Clyburn's effective leadership in the Whip's Office was crucial to our passage of historic legislation on jobs, health care, veterans and Wall Street reform on behalf of the American people," Pelosi said in her written statement. Clyburn's office declined to comment on the developments.

The leadership posts will be filled formally next week during a closed-door meeting of the Democratic rank and file.       

Remember last Friday's payrolls numbers--the ones that blew away expectations about the number of jobs created and got everyone talking about recovery again?

Well, even at the time those payroll numbers were confusing, because the other part of the jobs report--the "household survey"--showed yet another crappy number. 

But by pointing to the crappy household number and ignoring the payroll number, the bears seemed to be trying to make lemons out of lemonade.

But it turns out that there was a simple reason why the payroll numbers looked so good--a reason that had nothing to do with underlying strength of the jobs market.

What was that reason?

The government changed the "seasonal adjustment" it made to the payroll numbers--and, in so doing, boosted the number of "jobs" created in October by 100,000.

Stephanie Pomboy of MacroMavens (via John Mauldin) explains:

" 'The seasonal bar which the payroll data must jump was (inexplicably and dramatically) lowered from prior Octobers.

" 'Thus, in October 2009, the BLS set the bar at 870,000 jobs, similar to the 840,000 it anticipated in October 2008. This year, by contrast, it lowered the bar to 768,000. Mumbo, jumbo, payrolls presented "an upside surprise" of 100,000.'

Alan Abelson of Barrons (again via John Mauldin) adds the following:

"According to John Williams at Shadow Government Statistics, the BLS' fiddling with the figures via what he calls 'seasonal-factor games' actually created 200,000 phantom jobs last month. John cites such finagling as the reason his prediction of an October decline and a rise in the jobless rate was wrong. It also explains why seasonally adjusted payrolls were revised upward by 110,000 in September, including 56,000 in August."

In other words, it wasn't that there were a surprising number of jobs created in October. It was that the government changed its "seasonal adjustment" assumption in a way that made it look as though there were a surprising number of jobs created in October.

Now, seasonal adjustment is an art not a science. And maybe the new seasonal adjustment is more defensible than the old one. But if our government is going to publish a number like this that represents such a major "surprise," we would expect it to at least be upfront about the reasons for the surprise. And in this case those reasons had NOTHING to do with the jobs market, and EVERYTHING to do with the seasonal adjustment assumption.

Judges who hear Social Security disability cases are facing a growing number of violent threats from claimants angry over being denied benefits or frustrated at lengthy delays in processing claims.

There were at least 80 threats to kill or harm administrative law judges or staff over the past year an 18 percent increase over the previous reporting period, according to data collected by the agency.

The data was released to the Association of Administrative Law Judges and made available to The Associated Press.

One claimant in Albuquerque, N.M., called his congressman's office to say he was going to "take his guns and shoot employees" in the Social Security hearing office. In Eugene, Ore., a man who was denied benefits said he is "ready to join the Taliban and hurt some people." Another claimant denied benefits told a judge in Greenville, S.C., that he was a sniper in the military and "would go take care of the problem."

"I'm not sure the number is as significant as the kind of threats being made," said Randall Frye, a judge based in Charlotte, N.C., and the president of the judges' union. "There seem to be more threats of serious bodily harm, not only to the judge but to the judge's family."

Fifty of the incidents came between March and August, including that of a Pittsburgh claimant who threatened to kill herself outside the hearing office or fly a plane into the building like a disgruntled tax protester did earlier this year at the Internal Revenue Service building in Austin, Texas.

A Senate subcommittee is expected to hear testimony on Monday at a field hearing in Akron, Ohio, about the rising number of threats, as well as the status of the massive backlog in applications for disability benefits, which are available to people who can't work because of medical problems.

Nearly 2 million people are waiting to find out if they qualify for benefits, with many having to wait more than two years to see their first payment.

Judges say some claimants become desperate after years of fighting for money to help make ends meet.

"To many of them, we're their last best hope for getting relief in the form of income and medical benefits," said Judge Mark Brown, a vice president of the judge's union and an administrative law judge hearing cases in St. Louis.

While no judges were harmed this year, there have been past incidents: A judge in Los Angeles was hit over the head with a chair during a hearing and a judge in Newburgh, N.Y., was punched by a claimant when he showed up for work.

In January, a gunman possibly upset about a reduction in his Social Security benefits killed a security guard during a furious gunbattle at a Nevada federal courthouse.

About 1,400 administrative law judges handle appeals of Social Security disability claims at about 150 offices across the country. Many are in leased office space rather than government buildings.

Brown said the agency provides a single private security guard for each office building that houses judges. Frye said he has sought more security and a review of the policy that keeps guards out of hearing rooms. He said Social Security Commissioner Michael J. Astrue has promised to look into it.

Social Security Administration spokeswoman Trish Nicasio said the agency continually evaluates the level and effectiveness of office security and makes changes as needed.

"We are taking appropriate steps to protect our employees and visitors while still providing the level of face-to-face service the public expects and deserves," Nicasio said.

Visitors and their belongings are screened before entering hearing offices and hearings room, she said, and reception desks are equipped with duress alarms to notify the guard immediately of any disturbance.


Sales at U.S. retailers climbed in October by the most in seven months, brightening the outlook for holiday shopping even as unemployment holds near 10 percent.

Purchases rose 1.2 percent, exceeding the highest forecast among economists surveyed by Bloomberg News, according to data from the Commerce Department issued today in Washington. Another report showed manufacturing in the New York region unexpectedly shrank in November as orders dropped.


Mexican billionaire Carlos Slim, the world’s richest man according to Forbes Magazine, said there isn’t a currency war taking place among countries.

“There’s no currency war, only U.S. devaluing and devaluing,” Slim said during a presentation in Buenos Aires.


Inventories in the U.S. rose more than forecast in September as companies stocked shelves ahead of the holiday season.

The 0.9 percent increase matched the rise in August that was larger than previously estimated, the Commerce Department said today in Washington. Sales rose 0.5 percent, led by retailers.

Companies had enough goods on hand to supply 1.27 month’s worth of sales at September’s pace, the same as in the prior month. Inventory replenishment, a major driver in the early part of the economic recovery, is continuing at a stronger-than- forecast pace, indicating stockpiling will need to cool in coming months, adding less to growth.

“As we see inventory investment decelerate in coming quarters, the impact on GDP will be negative,” Sal Guatieri, a senior economist at BMO Capital Markets in Toronto, said before the report. At the same time, “inventory levels remain fairly lean and companies will need to continue restocking shelves and warehouses.”

Manufacturing in the New York region unexpectedly contracted in November for the first time in more than a year, a warning sign the industry that led the economy out of the recession may again be cooling.

The Federal Reserve Bank of New York’s general economic index fell to minus 11.1 from 15.7 in October. Readings less than zero signal contractions in the so-called Empire State Index, which covers New York, northern New Jersey and southern Connecticut. Economists forecast the measure would fall to 14 this month, according to the median projection in a Bloomberg News survey.


A Cambridge, MA law firm has sued the Securities and Exchange Commission on behalf of victims of Bernard Madoff, alleging that regulators failed to gather the facts needed to understand the convicted swindler’s Ponzi scheme.

Gaytri Kachroo, whose firm, Kachroo Legal Services, filed the suit in US District Court in Manhattan Friday, said that despite numerous complaints to the SEC about Madoff over the years notably by Boston whistleblower Harry Markopolos “the SEC did not understand those allegations or make an effort to understand them in order to pursue the case.’’

The SEC declined to comment on the lawsuit, for which class-action status is sought. The plaintiffs are seeking financial damages.

The lead plaintiffs are from New York and Florida; some Massachusetts investors are included, Kachroo said.


U.S. Representative Mike Pence, chairman of the House Republican Conference, said he plans to introduce a bill today that would force the Federal Reserve to focus solely on controlling inflation in making monetary policy.

The central bank is currently required by a 1977 amendment to the Federal Reserve Act to promote stable prices and full employment. Matt Lloyd, communications director for the conference, said in an e-mail yesterday that Pence wants the legislation to be considered in Congress’s current lame-duck session.

The Fed’s Nov. 3 decision to buy $600 billion of Treasuries in a bid to reduce unemployment is being criticized by officials in China, Germany, and Brazil, as well as U.S. economists including John Taylor and Michael Boskin. Pence joined the critics yesterday, following an open letter sent by a group of economists and former Republican government officials that asked Fed Chairman Ben S. Bernanke to halt the expansion of monetary stimulus.

“The Fed’s dual mandate has failed,” Pence, of Indiana, said in a statement yesterday.

“It’s time for the Fed to be solely focused on price stability and not the recently announced QE2,” said the 51- year-old lawmaker. Pence said the Fed’s second round of quantitative easing will monetize the U.S. government’s debt and ignite inflation.


When House Democrats return to Washington on Monday, a top priority will be putting a $250 dollar check in the mail to 58 million Social Security recipients.

Democrats plan to vote early in the lame-duck session on a bill that would provide Social Security recipients with a one-time payment, according to the office of Earl Pomeroy, a Democrat from North Dakota who authored the legislation.

The bill with a total cost of roughly $14 billion is designed to make up for another year without an increase in Social Security benefits.

In October, the federal government announced that Social Security beneficiaries will see no increase in their benefit checks in 2011. That will mark the second year in a row with no increase.

The last time there was an inflation adjustment was in 2009: Social Security beneficiaries got a higher-than-normal 5.8% increase because of a temporary spike in energy prices in the third quarter of 2008.

Soon after, however, energy prices plummeted. Then the bottom fell out of the economy and prices still haven't fully recovered. As a result, seniors haven't seen a boost in their benefits for two years.

By law, the Social Security Administration is required to track inflation using the most recent third quarter that led to an adjustment. But critics argue that by using only one quarter of data, the change in benefits is more volatile than necessary.

Advocates for the bill say it would help the economy as well as individual recipients.

"This relief will put money in the pockets of millions of older Americans struggling to make ends meet money likely to be injected directly into our fragile economy," AARP Senior Vice President Drew Nannis said in a prepared statement.

Earlier this year, the Senate rejected a bill similar to Pomeroy's that would have resulted in a one-time $250 payment to compensate for last year's stagnant Social Security benefit rate.

Republicans and deficit conscious Democrats combined to bring the bill down, and if this year's version passes in the House, it would face the same challenge in the Senate.

Funds that invest in debt securities issued by state and local governments fell the most in two years today as losses in the municipal bond market were exacerbated by a rise in their cost of borrowing.

The Nuveen Municipal Closed-End Index dropped 4.4 percent, the biggest decline since Oct. 15, 2008, after losing 6 percent last week, the largest retreat since February 2009, data compiled by Bloomberg show. Nuveen Ohio Quality Income Municipal Fund tumbled 7.5 percent, its biggest drop since Oct. 10, 2008, and the BlackRock Investment Quality Municipal Trust slid 7.2 percent, the most since Dec. 5, 2008.

Yields on top-rated 10-year U.S. municipal debt rose the most since March today as states and cities prepared to borrow about $16.2 billion this week, the most on record, according to data compiled by Bloomberg dating to 2003. Declines in closed- end funds may have been worsened because they borrow money to make their purchases, according to Peter Boockvar, a strategist with Miller Tabak & Co. in New York.

“The closed-end funds have a lot leverage in them, so the moves get exaggerated,” Boockvar said. “The main catalyst is that the spike in U.S. interest rates is obviously going to put pressure on anything that is priced off it.”