A large amount of investment funds entered the US from foreign investors last month, but unless US dollar asset yields rise the US may have more trouble in the future attracting funds, because the ECB has raised rates again ¼% to 3-1/4% and may well raise them once again to 3.5% soon.
On the other hand, North Korea has called George and the neocons’ bluff and exploded a nuclear bomb underground. George’s answer sounded like a line from a John Wayne movie, ”North Korea can either have a future or they can have those weapons. They cannot have both.” Next we expect an invitation to the OK Corral. George’s words ring hollow and that is how empires begin to collapse. This new foreign policy fiasco, the increase in ECB rates and lack of higher US rates will make it more difficult to attract funds to fund wars, occupation, debt and the current account deficit. As we have told you previously something has to give.
There is no more axis of evil. There is only little North Korea. Another big threat to the forces of evil is the end of the “terrorism” threat. That too will be exposed as a lie and a fraud.
You are all aware of American homes being used as ATM machines. When we declared that the recession had begun in January it was based in strong part on a diminution of value in real estate and the ability to draw against it. In 2006, we expect a fall in real estate equity withdrawal of about $1.5 trillion, money that will not be freed up for consumption. Those numbers should move over $2 trillion in 2007. That is a devastating fall in buying power. The only thing to replace it is the creation of more money and credit by the Fed and financial organizations and that is hyperinflationary.
On October the 24th the FOMC will probably leave interest rates unchanged. It’s just prior to an election and besides if they lower them the dollar will fall in value. They cannot have that because that would stop foreign investors from buying dollar denominated assets. As we said when the increases in the overnight rates paused, January was the first month that even a possibility of a change downward in rates would come about. The establishment economic hacks are looking at June as the month. We will see, as you can imagine the situation is fluid.
Just to show you how the stock market is being rigged, corporate profits rose $175.6 billion in the first quarter and only $22.7 billion in the second quarter. In the third and fourth quarters we see a further faltering. The “experts” expect 12.5% earnings growth in 2006 and the same in 2007. We see 4-5% at best in 2007. There is only so much you can see when you can be fired for telling the truth.
Those who run China and Japan see the economies of Europe and North America in recession in 2007, which makes those markets very suspect for their exports, so we see all of Asia closing trading ranks in an effort to internalize production and consumption to ride out what could be a depression.
Here is the latest on M3. Early October figures indicate a pick up in credit and M3 growth again. September was a little soft. Total credit is growing 8.2% YOY, but M3 is growing 9.3% YOY. There has been a slight up-tick in the highly sensitive home equity loans to 4.7% YOY. That should ease again in November. All other loan series growth rates are holding steady. If you add in independent financial credit growth you are looking at a net 11% or more. Total loans were up 8.7%, business loans up 13.6%, rollover loans 9.7% and consolidated loans up 1.8%.
Our government paid $184 billion in interest in 2005 and they probably will pay $220 billion in 2006. This is now the fastest growing item in our Treasury debt. In 2008, that figure will be $270 billion. In addition, we have a real accrual budget deficit of some $600 billion for fiscal 2006. Through August, our current account deficit was $522.8 billion. That puts our estimate of the 2006 deficit at just under $800 billion. We find these numbers discouraging.
The ECB as we said earlier is raising interest rates from 3% to 3.25% and we suspect we will see 3.5% before the year is over. The Bank of Japan wants to raise rates, but Japanese politicians, under order from elitists in Washington, have been told don’t you dare raise rates, this in spite of the fact that their deficits are bigger than those of the US. The Fed and US Treasury doesn’t want the yen carry trade stopped because it is pouring trillions of dollars into the world economy. The dollar is the centerpiece of the world monetary system. It is the world reserve currency and it is in serious trouble just as is the US economy. Debt payment as we just pointed out is the fastest growing item in the budget. Higher interest rates would slow the economy even more, expedite the collapse of real estate, but at the same time, keep the dollar from falling and keep it attractive for foreign investors. We believe that next year interest rates could be lowered and if that happens the dollar will collapse in a hyperinflationary environment much like Australia now has, only much worse.
One of the nasty little secrets in the home construction industry is that many homebuilders have increased their bank credit agreements, and despite record inventories and contract cancellations, homebuilders are still building because the banks are instructed to lend them more money. Anything to keep a collapse from occurring. We believe this is a complete abdication of fiduciary responsibility by the banks that are extending further credit to builders despite increased negative free cash flow. Part of the funds are being used in share buybacks while insiders sell their remaining stock holdings in their companies. We might ask where is the SEC? As usual, nowhere to be found. They are out chasing small brokers, small brokerage houses and newsletter writers.