International Forecaster Weekly

Loansharks Preying On US Soldiers

Loansharks preying on US soldiers, misaligned currencies, mortgage notes, Samsung price fixing, Wak-Mart suffers from theft, a breakdown in cheap interest rates, raising Arizona utilities through the roof

Bob Chapman | June 16, 2007

It is about time the Pentagon made significant changes to proposed federal regulations to insure that predatory lenders can no longer strip earnings from US soldiers and their families. The rules now allow these lenders to charge more than 36% interest.

The Pentagon recognizes that payday loans charge exorbitant interest rates of 400% and higher and a built in structure compels borrowers to renew an expensive short-term loan many times, because they cannot afford to pay it off. The typical payday borrower pays back nearly $800 for a $325 loan. The Pentagon’s rules limit the law to payday, auto title and refund application loans, and defined those so narrowly that many similarly structured high cost products already on the market will not be subject to the 36% cap.

The proposed rules would not apply at all to military installment lenders who refinance loans at high fees with little or no benefit to the borrower.

Many consumer organizations have called on the Pentagon to rewrite the rules to make the 36% cap meaningful by the October 1st implementation date or to take advantage of the extension Congress provided for in the Military Lending Act. Congress gave the Pentagon nine months after the October 1st implementation to refine the rules.

The situation is dreadful. Some companies target borrowers with bad loans like a $500 revolving loan with a fee of $149.50 every month plus the interest. That is 370% interest and that is exempt from the Military Lending Act. These lenders are simply loan sharks, something has to be done and done quickly for our young men and women who are dying daily in Iraq and Afghanistan.

Regarding fundamentally misaligned currencies headlines state that the Bill does not specifically name China or any other country. In addition, headlines state that the Bill would require the US Treasury to develop a new biannual report identifying 2 categories of foreign exchange misalignment, and that currencies misaligned due to “clear” foreign policy action should be targeted for “priority” action. “Priority action” countries would be opposed by the US for more IMF Voting power, and foreign exchange practices would effect a US decision on whether a country is “market economy” under law. The Bill threatens further penalties if appropriate action is not taken within 5 months, and would make Treasury and central Banks consult on ”remedial” foreign exchange intervention if there’s no change to that country’s policy after one year, while also requiring the US Treasury to initiate a case on the currency at WTO. Furthermore, the Bill would allow currency undervaluation to be reflected in US anti-dumping duty calculations, and would deny misaligned currency countreis access to US Government procurement market.

The Mortgage Bankers association’s weekly mortgage index rose 6.6% for the week ended June 8th. The 30-year fixed mortgage was 6.61%, up from 6.35% for the week ended June 1st. The 4-week moving average for all mortgages was down 0.3%. Refis were 38% of all appls, unchanged and ARMS increased to 18.7% from 17.8%.

The perceived risk of owning low rated subprime mortgage bonds created in the second half of 2006 rose to a record as loan delinquencies and mortgage rates climb, according to the index of credit-default swaps linked to 20 bonds rated BBB-, which fell to 62.12 according to Markit Group. The 10-year US Treasury note has been trading between 5.20% and 5.30%, and that has put the 30-year fixed rate mortgages at 6.65%. That is only 10 bps away from the lower end of our projection of rates of 6.75% to 7.00% by yearend. These higher rates are putting further extreme pressure on the CDO and real estate markets, as well as the stock market and corporate America.

We just saw a video on WINK out of Fort Myers in Florida, which is very close to where we once lived. It was an auction of 50 townhouses that cost present owners $300,000, that were auctioned off at about $145,000. The present owners are furious because the builder said they would auction homes off. This is a former hot area as was most of southern Florida on both coasts.

The US agencies that supervise more than 8,000 banks haven’t censured any subprime lenders for violating fair lending laws, three years after Fed researchers began assembling data showing blacks and Hispanics are more likely than whites to be saddled with high-priced home loans. We believe that is true, but we also know that they were the least qualified and most should never have been given loans in the first place. The Fed has hundreds of lenders tagged for investigation, but, of course, nothing happens.

Samsung Electronics has agreed to pay $300 million to settle US criminal charges it took part in a global conspiracy to fix the price of digital memory chips used to make personal computers, mobile phones and other electronic devices. This is from 10/13/05 when we first reported it. As usual no one went to jail, all government wants is the money. We find it of great interest that there never is an investigation of the US Treasury, the Fed, and other central banks and their manipulation of the gold market.

The Fed’s mid-April through May Beige Book showed significant price increases for energy related products. There was continued weakness in residential real estate and construction, but rising strength in commercial real estate.

The crooks at Morgan Stanley will pay $4.4 million to settle a class-action suit with brokerage clients who bought precious metals and paid storage fees. They told clients it was selling them precious metals that they would own in full and that the firm would store. They shorted the metal to themselves and never owned the physical metal. They could get away with it until discovered because they were part of a US government conspiracy to suppress precious metal prices.

Wal-Mart loses $3 billion a year due to theft and it’s increasing due to shoplifting, employee theft, paperwork errors and supplier fraud. The firm no longer prosecutes minor cases focusing on organized shoplifting rings. They have cut staffing and that as well has resulted in more theft.

Collectively retailers lost $41.6 billion last year, or 1.61% of sales in 2006, up from 1.60% in 2005. Forty-seven percent is from employee theft, 34% from shoplifting, 4% from supplier fraud, and 14% from administrative errors.

Business inventories rose 0.4% in April as sales gained 0.7%. The inventory rise was the most since September.

The May import price index rose 0.9%, as the experts were very wrong again, projecting 0.3%.

For years private equity firms have basked in an era of cheap money and low interest rates. The breakdown in the bond market is telling us that era may well be coming to an end. The favorable conditions that have lined the pockets of corporate raider-asset strippers for Blackstone, Carlyle and others are coming to an end. We believe it will take another year to wind down, but the golden days are now behind them. We even have Bill Gross of PIMCO who has been dead wrong on interest rates telling us that over the next 3 to 5 years Treasury yields will rise as high as 6.5%. Bill is wrong again. Rates are going up but they will see 5.65% to 5.9% this year and 6.5% next year. At least he recognizes the era of cheap money is over. That sea of money has to find another home and it won’t be in bonds or the market. The only other logical choice is gold, silver, uranium and commodities. It certainly won’t be in real estate. Bondholders have finally seen the light, that is rising commodity and labor costs in low cost countries, such as China, India and Mexico. Major inflation is here and it is going lots higher no matter what official statistics tell us. Interest rates are finally being reflective of economic reality and decisions in the future are going to be very difficult to make. Rates should have gone higher three yeas ago, but the yen and Swiss franc carry trades were able to stall elevated rates. This means investment funds that went into private equity groups and hedge funds have to be reevaluated because some of the leverage is gone. That means they have to find a new home for those funds and that points directly toward gold, silver, commodities and uranium. Just to give you a small idea of what kind of money we are talking about, so far this year private equity transactions have accounted for about a quarter of the $2.3 trillion of worldwide deal activity. That figure was 10% in 2002. That is $575 billion. As buyout activity diminishes so does a key source of support for stocks on Wall Street. When a buyout firm takes a company private, it decreases the number of shares available in the public market, thereby raising prices for the shares remaining. That prop is going to be lost to the market. The higher interest rates come at a time when these groups are overpaying and when leverage is at its height. This all isn’t going to happen overnight, but the trend is set and in a year or two the heyday of the buyout kings will be mostly over.

Government tells us inflation is 2.8%. They should tell that to Arizona Public Services, which is raising utility rates 20.4%.