International Forecaster Weekly

Learn To See Through The Economic Data For What Is Really Going On

Fed the only creator of stability currently, subprime crisis not over, expect a tidal wave of losses for years to come, Fed crassly believes new monetization isnt new money,  but Fed is really creating inflation, a coming winter of discontent, cuts to T-bill purchases

Bob Chapman | September 23, 2009

As pick and pay and prime loans crash into foreclosure and their high to high medium priced homes descend in value, how can Wall Street and Washington celebrate a slight increase in low-priced housing? As you can see, from figures appearing later in the issue, whatever stability there might be is being supplied by the Federal Reserve. It is a make believe market with 85% of mortgages being funded by government agencies at taxpayer expense. There is no cause for celebration as government and the privately owned Fed shove systemic problems somewhere off into the future.

Some believe the subprime crisis is behind us. It isn’t, if you cast your eyes on Washington and observe the toxic loans they have been insuring for the past year through the FHA. They will build up to another subprime crisis in about a year to add again to existing problem loans. This time the failure rate should be about 70% and perhaps higher. We are about to see the result of the partnership of Citibank and others and ACORN and their program of home loans for illegal aliens. This program is four years old and has received billions in tax dollars to house people who are illegally in our country. The re-loans were made at below-market interest rates, with down-payment assistance and no mortgage insurance requirements. You as American citizens are not offered such deals; you just get to pay for them.

The past two and present administrations were all in on the program, a program the mainline media failed to inform you of. Washington knew what it was doing; they were placating the minority interests of two Marxist groups, ACORN and the National League of LaRaza. Washington for political reasons has been extorted and blackmailed at our expense. The 1977 Community Reinvestment Act has been turned upside down for corruption and profit. Even defrocked crook Henry Cisneros, an ACORN advisory council member, is involved as he was at Countrywide. He resigned from the Clinton administration from his position as HUD secretary after lying to FBI agents about payoffs to his former mistress. What a gaggle of malefactors.

The entire experiment has been reminiscent of something we’d expect to have seen in the 1930s in Russia or Germany. As a result of the Fed, banks, Wall Street and government the tidal wave of losses will stretch for years to come, as a reminder of what a criminal society we live in. The days of 20% down and a good credit rating are history. Now anyone who can make his or her mark on a contract can have a home. In fact, next we expect that homes will simply be given away to the poor and minorities, because society and we owe it to them, as we fail to pay our mortgages to usurious banks that create money out of thin air and lend 45 times their deposit base. You ask how could any sane person keep money in such banks? As a result homeowners have little home equity left, because bankers have caused a housing collapse and these same banks are broke. That means our society and our financial system is broke. Homeowners are not going to pay a mortgage on a property that is worth substantially less than the loan on the dwelling. We wrote six years ago that Fannie Mae and Freddie Mac were broke. Everyone in finance and in Washington knew that but no one was listening. We said at that time that the federal government would end up owning about 50% of the homes in the country and that is just what has happened. Next comes further socialization. Eventually Washington will rent the homes they have in inventory and eventually people will be told where they will live and where they will work. Then who they can marry and who can have children and who cannot and where they’ll work and at what job. This is the utopia the Illuminists have prepared for us.

Today some 16 million homeowners have negative equity, which for them is a nightmare. Most of those who speculated in real estate have been wiped out and commercial speculators are next. By the end of 2012, 70% of Americans with home loans will have negative equity and those who own homes outright will suffer losses in equity of 40% to 70% of the value of those homes. The largest source of Americans net worth will be wiped out. You might call it the pauperization of Americans. Couple this with no jobs or poor paying jobs, due to free trade and globalization, lower wages, higher inflation, and a deflationary depression, and you have the stuff revolutions are made of.

Almost all the subprime loans were a failure and now our government is again funding thousands of them. Those are the FHA loans, which make up 25% of loans, subprime all, with a 3.5% down payment, that already has an 8% failure rate. These are people who should not have loans. The LaRaza illegal aliens and minorities and others who are ill equipt to service these loans. Already 12-1/2% of mortgages are in foreclosure, or are late pays. Unemployment is 21%; and those foreclosures are going to increase. Foreclosures are at four million a year and climbing. Over 50% of those failures are from prime borrowers, which means more expensive homes, which means bigger losses. We will be lucky if this massacre ends in 2013.

When Sir Alan Greenspan is alarmed by what the Fed is doing in regard to the expansion of money and credit and monetization, you know we have a serious problem. Failing to stop will lead to hyperinflation and Sir Alan says, “If the Fed doesn’t stop we are not looking at 3% to 5% inflation, but double digit inflation.” Excess bank reserves have fallen 50% in a year. As long as the banks won’t increase lending the Fed has to increase monetization. The intransigence of banking to lend is worsening. The rate of growth was minus 4.89% last week, as consumer credit fell 4.2%.

One of the Fed’s contentions is simply absurd. It claims all of this money and credit they are creating isn’t really new expansion, but the use and employment of commercial banks’ surplus reserves. That is a circular argument, because the banks are technically broke and that bank money the Fed is using was lent to them by the Fed. The bad assets on the banks’ books more than offset the asset, which is why the Fed is buying those assets, such as CDO’s, and won’t tell us what they are paying for them. It is another state secret.

Those so-called reserves are helping to fund the purchases of Treasuries and Agency debt and mortgage backed securities. That is those CDO’s whose losses the American taxpayer will have to eventually pay for. Every time the Fed borrows those funds they are monetized. The money the banks’ receive is lent to brokerage houses, 21 of them, and they use those funds to loan to those houses, which invest it at the whim of the Fed to manipulate markets. This is an increase in the money supply. Those at the Fed would have us believe that inflation is driven by expectations and the degree of pressure on resources. What foolishness, they know only the Fed can create inflation. They are trying to tell us prices are not related to money, which is a lie, of course they are.

All the monetary creation ruins the value of savings and the formation of savings and at the same time destroys the value of the dollar. In addition, once banks start increasing lending, if ever they’ll start their own brand of inflation. Present policy is doomed to failure. All the elitists are doing is buying time. When that time runs out the game is over.

Until the next election the economy should go sideways to slightly better. Next summer through November should be best, but that will be the end of somewhat better times. The parallel movement you are seeing is the result of a massive injection of money and credit over the past year. Next year you will see the results of 80% of the stimulus program. This period should have been spent redesigning the international monetary system, but instead it was used to pick a right spot to finally destroy the world economy, as we have known it. In finality it will be every country for itself. Some will survive and some won’t. The world is going to be full of revolution. This coming year will be full of rising unemployment though not at the rates seen this year. More foreclosures and bankruptcies, a fall in the dollar and other social and monetary shocks. More countries will move away from the dollar as it relentlessly weakens versus other major currencies and gold and silver.

Issues over this next year will be as much social and geopolitical as financial and economic. Starting next month we will see the dollar on the USDX Index at 71.18, or at least by year end. We recommended dollar shorts at 89.5. Friday’s close was 76.44. Dollar creation has been and will continue to be out of control in the midst of another Keynesian experiment. The future may become clearer in late 2010. Will we stay in inflation or hyperinflation or will we finally be headed into deflationary depression?

We must prepare ourselves to see through the morass of propaganda, lies and the manipulation of economic data to save our lives and our wealth from control or chaos. Due to the changing forces no one can predict which way things will head. All we know is none of them are good. You are for certain not going to get the truth from the mainline media, nor any government agency, nor from Wall Street and banking. You have to go to alternative talk shows, the Internet and to the International Forecaster as well as a small handful of other truthful publications.

There is no question that worldwide the economy, monetary and financial systems are like a ship no longer able to steer itself at sea. Any untoward event could send any part of the system on to the rocks. In every country debt is disturbing if not colossal. The idea that government can replace corporate America and consumerism is ludicrous. As we said in January that an $800 billion stimulus package was not enough, and that Congress would be asked late this year or early next year for an additional $2 trillion. Either that or banks would have to increase lending or a combination of both to again delay the inevitable collapse. That, of course, is in addition to the $2.5 trillion being injected into the economy in deficit spending and by the Fed.

Do not be deceived. What we are seeing is a global problem that is very evident in Europe and Asia as well. What happens when blocks of unemployment checks run out? The public is already learning that unemployment is not 9-7/8% in the US. It is more like 21% and in China it is 30 million just among factory workers, never mind what it is at the countryside. Government funds creating temporary employment won’t work and neither will hiding the truth whether it is in NYC, Tokyo, London or Paris.

October will bring a winter of discontent, a new period of adjustment as hundreds of thousands of Americans lose their unemployment checks. This is accompanied by mounting home foreclosures and private and public bankruptcies. Corporate bankruptcies are already at a record high. This is a worldwide phenomenon. The opportunity to save the system is long past as we predicted in June 2003. In fact, things have degenerated so badly that we now have a dollar carry trade and corporate financial statements that are mark-to-model, which hides trillions in near worthless assets. In October, the corporations will have to deal with Basel III and the new FASB rulings, which demand full accounting of balance sheets. That should be a telling event if it ever comes to pass. We will know in two weeks.

In a similar vein it is obvious that the Fed and Treasury are allowing a controlled decent of the dollar. If that is correct we can expect a major defense of the dollar at 71.18. The price of recovery is a lower dollar. This lower dollar is a tax on Americans who hold 98% of their assets in dollars. That means a lower value for those assets in terms of gold and other major currencies.

All that money from out of thin air the Fed is using is being used to revive housing by keeping interest rates down. Part of that is the $8,000 break for first-time homeowners, which will distort markets in the long run. This secret purchase of mortgage debt puts more pressure on the dollar and it creates a fake sense of security in the markets. A blank check can only lead to disaster. In part, TARP and other funds lent to banks are being used to again gamble in the markets. This is why defensive money is buying gold and stronger, safer currencies. All the while the value of the dollar is shrinking. This is why we recommend gold and silver shares and coins and for those with large holdings, Canadian and Swiss Treasuries.

Last week the Dow rose 2.2%; S&P gained 2.5%; the Russell 2000 gained 4.1% and Nasdaq rose 2.4%. Banks rose 5%; broker/dealers 3.9%; cyclicals 1.5%; transports 0.1%; consumers 1.1%; utilities 3.6%; high tech 1.7%; semis 1.6% and the Internets 2.7% and biotechs 3.1%. Gold bullion rose $2.30 and the HUI gold index slipped 0.5%.

Tw-year T-bills rose 8 bps to 0.94%, as the 10-year notes rose 12 bps to 3.47%. The 10-year German bund rose 14 bps to 3.37%.

Freddie Mac 30-year fixed rate mortgage fell 3 bps to 5.04%. The 15’s fell 3 bps to 4.47% and one-year ARMs fell 6 bps to 4.58%.

Fed credit rose $19 billion to a 17-week high of $2.089 trillion. It is up 124% yoy. Fed foreign holdings of Treasuries, Agencies debt jumped $15.0 billion to a record $2.843 trillion. Custody holdings for foreign central banks, expanded at an 18.2% rate and yoy were up 18%.

M2 narrow money supply rose $12.6 billion to $3.482 trillion as government guarantees ended on 9/18/09. They have declined $348 billion ytd, or 12.8% and they are up 2.0% yoy. The exodus has begun.

The USDX, the dollar index, slipped again this week, down 0.1% to 76.51.

In the second quarter the Fed accounted for almost 50% of US Treasuries. That is $164 billion worth versus the combined foreign household UST purchases of $10 billion and $29 billion, they and primary dealers.

Now the question arises how long can this go on? Everyone is cutting their purchases of US Treasuries, households alone by 40%. At this stage even higher interest rates won’t help, especially if inflation rises substantially, as we believe it will.

Official California unemployment is 12.2%. In reality it is probably more like 25%. Incidentally it was 14.7% in 1940.

The FDIC is going to ask wealthy banks to put up more money to support the agency and pay for failing banks.

Here we are just six months after Dow 6,600 and trailing the trailing price earnings ratio is 26.5 times earning. The P/E on earnings per share is 184.2 times. The price to dividend is 53 times, where it was at the 2007 highs. The price to book is 2.3 times.

Due to Fed and Treasury monetary and fiscal injections into the economy, GDP expanded 5.3%; corporate profits by 34%; mostly coming from layoffs; employment is still declining and bank lending was up 16.5%.