International Forecaster Weekly

Laugh at the Economists

we dont think the recession has really begun as of yet, commodities will move upwards, relentlessly, return of the woeful scamming preacher, shorts on all sorts of things, a little tarriff protection might be a good thing now, pullouts, kickbacks, credit problems cause greater need for capital all around,

Bob Chapman | January 26, 2008

We have to laugh at economists; analysts and other writers who think a recession may have begun. It’s evidently time for them to join the herd – it’s safe now. They won’t get ostracized for making such a decision before their peers. They won’t be scolded by management or lose their jobs. We said a recession began more than a year ago. We were right and as usual most everyone else was wrong. Then again, we do not have to answer to an employer. Our employers are our subscribers and they want the truth when it happens, not when it is officially okay to divulge it. We already are seeing prognosticators beating their chests because they predicted the housing subprime crisis. Where were they three years ago when in October of 2004, we told people to prepare to sell by June of 2005 if they wanted to sell because that would be the top and it was. We also predicted that not only would there be a subprime, ALT-A implosion, but also a dramatic fall in real estate prices, which has been in process since June 2005. That is a year and one-half before 99.9% of the experts. It was more than a year ago we called for oil at $100 to $120 a barrel and again we were a voice in the wilderness, as we were in April 2000 when we were among only 1-1/2% of all economists, analysts and newsletter writers who called the top of the dotcom bubble.

House prices will continue to fall for another two to four years dependent on whether the government disrupts the market with subsidies or a bailout. Oil will move relentlessly upward as will most other commodities. Gold over the next two years will reach $3,000 an ounce and silver will top $100 an ounce in spite of the central bankers suppression techniques. They will run out of gold for sale, the market will fall and the only go to investment will be gold and silver. When 98% of Americans, Canadians and Europeans are out of the gold and silver markets you have to be very bullish.

The dollar will continue its slide ending up if Americans are lucky at 40 to 55 on the USDX. It is currently 75.75. That will give American exports an advantage, but we export so little that at 50 we can only increase GDP by ½%. That we improve our current account deficit but not substantially so. The only thing that can really help is trade tariffs on goods and services. While we improve our trade deficit, foreign goods will increase substantially in price and prove to be very inflationary. Wall Street, politicians and corporate elitists refuse to face the music. They refuse to purge the system and eliminate the unbalanced economy. That means eventually strong corrective measures will have to be used and gold and silver will have gone higher than most had dared to anticipate.

Now we are told, in spite of an ongoing credit crisis, the recession that we supposedly are just now entering - maybe say the experts – that they already know this will be a mild recession. How can they know that when they are not quite sure we have entered a recession? They say the recession we “may” be entering will start a recovery in the third quarter. It all sounds like the pitch from a flim-flam man. Unfortunately Elmer Gentry isn’t available because Mike Huckabee has already reincarnated that woeful scamming preacher of the 1920s and 1930s.

As you know we have short recommendations on homebuilders, suppliers and some financial companies. Some of these companies will go bankrupt. The most vulnerable are the builders and suppliers. The government is bailing out Countrywide and WaMu, but the builders and suppliers are fair game. The industry still doesn’t get it. In order to cut stuffed inventories they either have to stop building or cut drastically. The professionals have to expect that home production has to fall 60% to 75% from its peak. Two million excess homes were built for people who cannot afford to pay for them so that we wouldn’t have a recession/depression seven years ago. Sales will fall to 1991 levels and lower, and those inventories will continue to rise until lenders and builders get the message. We still have 75% of the housing correction to go. In the former 30 hot areas prices will fall an average of 35% and 40% to 55% in some areas like California and Las Vegas. Those who see a shallow soft-landing don’t know what they are talking about. It will take a 27% decline in prices to bring house prices in line with rents. A 24% decline is needed to re-establish the normal relationship with building costs. Next will be the homes purchased by speculators. They either have to rent at a loss, or face foreclosure. That will add to oversupply. Consumers are up against it. No more home loans, no savings 11.6% inflation and a 4% increases in wages. That is a 7.6% loss in buying power annually. The price of their biggest asset is falling and the wealth affect is gone. Even if we work through 2008 and 2009, we face a moribund real estate market for a minimum of 2010 and 2011.

We than have the ongoing fallout of CDOs, MBSs, SIVs, ABSs, etc. We have a credit crisis and about two million in mortgage paper that has gone bad. That’s $2 trillion in losses. We are in a recession; who will the buyers be? Free trade, globalization, offshoring and outsourcing are causing many prime credit rated people to lose their jobs and many face foreclosure. What happens when the derivative bomb explodes? What happens when the Dow revisits 7286? What happens when pension funds cut their payouts to retirees? Several large bond insurers are near collapse. Who will cover the loss on the unpaid insurers – the insured of course? We are going to see credit default losses and insured losses for at least two more years. Who will pay for counter party failure? Will sovereign funds want to invest $100 billion in the US financial sector/ That’s what it is going to take, if not more to keep many big companies from going under. A Fed lending rate of 3%, down from 4% is too little too late and the wrong formula. We do not see any Wall Street headlines telling us M3 is up 17.5%. Sooner or later the public will wake up as will the Fed, only it will be too late.

We are in the confluence of several extraordinary developments that will keep policymakers at the Fed, in banking, on Wall Street, in corporate America under pressure. You saw the warning signs last week as we witnessed the president meeting with his “Working Group on Financial Markets.” Not once anywhere in the media were we told that this is what that meeting was all about and why the conclave was unique. When the PPT meets in the open you know there’s trouble. The public didn’t know what was going on, but Wall Street and corporate America sure did. Our conclusion is they cannot solve the problems and the bubbles can no longer be ignored. If they restrain credit the economy collapses, if they allow unlimited credit the problem will get worse. A middle of the road approach can buy time, but in the long term it won’t work either.

The stock market is trying to go lower and every extraordinary means will be used to keep it from doing so. That is primarily what the “Plunge Protection Team” meeting was mainly about. Try as they may we’ll see 9,800 to 11,000 on the Dow this year. Consumers are meeting recessionary headwinds, buried in plenty of debt and with no savings. They look at official unemployment climbing, wages stagnant and the price of their house falling and they get the willies. The elitists want the market to hold up to cushion the credit market crisis and to mislead the public on real inflation.

We already have a crisis of confidence; why else would the Working Group on Financial Markets be meeting with the President? He’d instead be meeting with his Cabinet to solve problems. That is because Wall Street is running our government – not the President and not Congress. The market is falling along with the dollar and gold and silver are rising. The stakes are high. The world hopes the Illuminists will succeed rather then face depression. This same group has brought us to the edge leaving us with enormous financial economic and geopolitical risks that from our point of view are insolvable. We have to introduce tariffs to protect what is left of our economy and go through the purge of depression. Increasing financial slows only further destabilize the system and creates more imbalance and inflation. It simply won’t solve the long-term problem at whose base is a fiat money system.

What the fed doesn’t have is flexibility and their efforts are complicated by global inflation and massive money and credit growth worldwide. This is what happens when you have a worldwide Ponzi scheme. Not only is money and credit expanding in the US at a 17-1/2% rate, but the average is 14% worldwide. Contemporary finance is coming unglued and massive liquidity injections won’t forestall implosion. The Fed is desperate to keep credit from seizing up further. They may be successful short term, but long term it won’t work.

We haven’t heard much about Goldilocks lately on CNBC. That is because they know what is going on and it is very bad. Wall Street’s mistakes are being funded by sovereign funds, which not only get equity, but dividends of 9% to 11%. Those dividends that are sent to the foreign holders put additional pressure on our current account deficit. Not only that, they are exchanging unwanted dollars for our assets.

Unless we pass legislation enacting tariffs on goods and services we’ll never be able to protect our businesses and way of life. Our manufacturing base is being torn to pieces – the heart is being ripped out of our country. Unemployment is 14% not 5%. Doesn’t anyone get it? Our government is lying to us. In the process our Fed has given us and the rest of the world major inflation. In fact, we have double-digit hyperinflation and so does everyone else.

Just because all the paid whores in the media, Wall Street and government refuse to recognize or admit our problems, doesn’t mean they do not exist. There are only a few people willing to tell the truth. The rest are terrified of being ostracized, or accused of being enemies of the state or terrorists. That is why well-respected economists, analysts and most writers refuse to tell the public the truth. Thus, the destruction of our economy continues unabated.

Citibank tells us a jump in ATM fraud has caused them to slash the maximum amount of cash available to customers from their accounts. In some cases half. We believe more likely Citi is having problems acquiring hard cash, and is passing the problem on to their customers. It could be they are out of capital computation under Basel II and could be on the edge of insolvency. This could be where the entire banking system is headed. For the sack of protection you can have $5,000, $10,000 or $15,000 in ones, 5’s, 10 and 20-dollar bills in your safe along with your gold and silver coins. There is no question the cutting in half of withdrawal ability means Citi is in trouble and they show all the earmarks of trouble.

Mortgage scams are rife in Southern Nevada as people lose their homes, life savings and good credit. It is called equity skimming and we are talking hundreds of millions of dollars.

The first piece of advice in closing any non-traditional transaction is to have an attorney go over everything. Otherwise you may sell the property to a corporation or for an exchange of stock that turns out to be worthless. In the current market there are a lot of people who for various reasons, may want or need to sell their homes. When that need to sell becomes desperation, homeowners become lucrative targets for scammers. It is just not sellers who are exploited in mortgage fraud. Thousands of unsuspecting homebuyers in Las Vegas became victims through cash-back deals involving the seller, mortgage lender, appraiser and other essential parties in real estate transactions. Almost every one of them is pitched as an investment. Homes never get sold for what they are worth.

Due to these tactics and many others, Credit Suisse and other institutional investors are pulling out of Vegas. That is why Las Vegas is going to take a dive worse than anyone thought. Appraisers say lenders have been known to ask appraisers to set a minimum value or they will not offer the loan and will shop elsewhere for appraisers who agree to meet their demand. The problem is epidemic on the refinance front. Fraud has absolutely destroyed the market.

Many of the scams were a repeat of what we saw in the late 1970s and again in the late 1980s in California. Agents and loan officers obtaining funding for totally financially unqualified clients from several subprime lenders who offered “stated” loans, or those that required no income verification at higher interest rates than conventional loans - false application submittals or totally fraudulent loans. It was not only these frauds, but also the frauds kept prices high defrauding new buyers. Homes were bought and “flipped” at staged prices to increase value. Then came the inflated appraisals that decimated lenders via the loan-to-value requirement. There were kickbacks everywhere. These frauds involved many people. Million-dollar homes purchased with $500,000 kickbacks in which the buyer never makes a payment and the lender ends up with the house. It goes on and on and it will take a few more years for the excess to be deflated from the system.

American Home Mortgage’s plan to destroy 490,000 hard copy mortgage loan files has drawn fire from federal bankruptcy monitors, who say it could hurt homeowners’ ability to sue the failed lender. The company says it can no longer afford the $45,000 per month rental on warehouse space to preserve hard loan files. The loan files the company says have been fully imaged. It looks like the company wants to destroy evidence of fraud.

Many banks have only survived because they securitized risks, which should have never been assumed in the first place, and via the use of derivatives, passed on the risks, that they would have held in their entirety. It demonstrates in part why banks made some terrible loan decisions. This was called the “originate and distribute model,” which transformed banks into real money making machines. Instead of being smoothly absorbed by the global financial system it was contagious, prompting a paralysis among professional investors due to the fraud involved via rating, and caused a crisis of confidence and trust throughout the entire banking system. Far from dispersing the risks they had underwritten, banks are being shown to have stashed loans in complex structures that ultimately required their support. From the banks’ side they could not dump all their toxic CDO’s before they were found out. Now their excuse is, “see we are suffering with you.” Now we find there are hidden assets in many places that are worth $0.30 on the dollar and their asset base has been crippled by losses with more losses to come This subsequent correction is likely to have far-reaching consequences for how much capital banks need, how they are regulated, how they hold assets (no off balance sheet items), how they are regulated and how they make money in the future. Regulators and the BIS let this go on and the deleveraging process will be long and painful.

The days of share buybacks and high dividends are over. We are looking at $1 to $2 trillion of losses hidden away in off-balance sheet vehicles known as conduits, created to end run regulatory and BIS rules. Both groups knew what was going on but allowed it to happen. A good example is SIVs or structured investment vehicles. Now banks have had to take responsibility for these ruses as well as to bail out investors in money market funds. Thus far a dozen or so have injected more than $4 billion in these funds. No one seems to want to know how much more money the banks will need from sovereign funds and others. We see more than $100 billion. That does not represent the liability. That is immediate infusion. The losses could be well over $1 trillion and $700 billion in Europe. Both banking sectors are out of capital with a deficit equivalent to 5-20% of the banks’ market value. A good part of the problem is that the approach to measuring risk by Basel II was based on the use of complex risk models that have been thoroughly discredited. This is a sobering experience when the engineering from the top is poorly formulated.

The fallout is that banks assumed too much risk and committed fraud. Even banks that did not get caught in all this, they find they need additional capital due to the credit crisis or the lack of interbank lending. If capital is not available many lenders, through no fault of their own, could be forced to merge or be bought out. For those who do survive higher levels of capital will depress returns as an elevation of credit criteria squeezes profits. It will be some time before lending and financial stocks recover. In addition, we are in a recession and that will compound banking problems. There is no question that there should be far more stringent regulations for banks and a return to Glass-Steagall. Law doing away with the Act was a tragic mistake. We wrote reams on it, but no one listened. Reforms are also needed in the mortgage industry. We see a very rough landing over the next two years and a return to basic lending values.

The global picture is darkening by the day as the “Working Group on Financial Markets” strives to keep the stock and financial markets from collapsing. We are seeing signs of a slowdown from Asia as the Baltic Dry Index plunges and Singapore’s economy contracts 3.2%. The Nikkei Dow is in a state of collapse. This is the same Asia that was supposed to take up the slack as the US and European markets folded. The Japanese are bringing money home and that is why in part the yen is rising and the carry trade is unwinding. That unwinding means that the Working Group on Financial Markets is becoming tenuous.

Then we have contagion in the loan sector. From subprime, to ALT-A, to prime, to commercial real estate, to commercial paper to auto and student loans to credit card debt-ABS. We are looking at $3 trillion plus in losses, plus Spain, Ireland, Britain, Greece, Australia and Eastern Europe. No matter what the Fed, Wall Street, the administration or corporate America does the tide cannot be held back. Get ready for a rough ride.
Chief US equity strategist at Citigroup and Abby Joseph Cohen, both of who have been spectacularly wrong over the years tell us that we should see 7% growth in the S&P in 2008. If you want to lose money go right ahead and listen to them. They are counting on a 3% prime rate and an M3 increase of over 20%.

What a better way to start the year then to sock it to grandma and grandpa with a big price increase by insurers in the Medicare prescription drug plan. Premiums will increase 25% in 2008 - that is ten million seniors.