International Forecaster Weekly

Market Distortions A Product Of Fed Decisions

Any coming rally will be built on sand, Fed over a barrel and will act that way, big leverages led to a the big collapse, we know financial institutions should never be allowed to self regulate, production decreasing, liquidations rise, lies of Cheney exposed, GM in chapter 11.

Bob Chapman | June 6, 2009

Ron Paul’s Audit the Fed bill is now up to 190 cosponsors!

A recovery is supposed to be in the works in the midst of increased savings, declining debt balances on credit cards, more bankruptcies, higher unemployment and new wave of foreclosures. Consumer participation in GDP is down from 72% to 70.4%. Bank and other financial firms’ balance sheets are what they say they are and we have a stock market bear rally built on sand just as we had in 1931. And, lest we forget, bogus government statistics calculated to confuse professionals and investors alike. What an upside down world. How do you make money when you are losing money? Wait until late July and in August when the second quarter earnings are released by financial firms. They won’t be pleasant reading. The market rally and much of the earnings are simply fraud. Wall Street and investors simply shrug their shoulders and look away. They know but they do not want to know. Ever present in the scams is the SEC, which has never seen a major firm they did not like. Acting on violations only when forced too at large firms and perpetually pursuing the small and medium sized brokers and brokerage firms and newsletter writers. Then there is the veracity of our government for which few have any respect, trust or confidence. Our treasury department woefully short of revenues has the privately owned Federal Reserve monetizing sovereign debt because they cannot sell it all, some $300 billion in Treasuries and $750 billion in Agency debt as the Fed monetizes an additional $1.5 trillion in bank owned CDOs, collateralized debt obligations, so as to remove them from bank balance sheets so they can purchase Treasuries to compete the daisy chain of fraud. Ten-year Treasury note yields as a result have traded up to 3.84% from 2.35% just five months ago. Foreigners are sellers as an avalanche of Treasuries hit the street. The demand for Treasury funds over the next few years will be colossal. If government raises taxes the economy will fall further. As we forecast earlier the Fed could monetize $2.5 and $4 trillion in Treasuries and other toxic waste by the end of the calendar year. Incidentally, there is not a remote chance that the Fed will ever be able to withdraw funds from the system and every professional has to know that. The result is a collapsing dollar and higher gold and silver prices in anticipation of higher inflation. This year the dollar could easily break 71.18 on the USDX, the dollar index, versus six major weighted currencies. That would again cause, as it did from 11/07 to 6/08, countries and foreign businesses to reject taking dollars in trade. Such an event is in our crystal ball. Propaganda and smoke and mirrors won’t work this time.

Earlier this week our Secretary of the Treasury was booed, jeered and laughed at during a speech to students at Beijing University. That is what minds outside of the box think of our monetary policy. He said trust me, they said no. Needless to say, this was little reported in the mainstream media. The people representing the money powers that control our nation are viewed as an international disgrace. Foreigners recognize the financial Mafia that runs America, but most Americans are clueless to who the real power running America is.

We have heard much about the 40 to 60 times deposit ratios used by banks in the 2003 thru present period. Normally that ratio is 8 to 10 to one dollar on deposit. We painfully remember the subprime and ALT-A loans and the totally unqualified that received them. Then the loans that Fannie Mae and Freddie Mac should have never approved and finally the asset backed securities and collateralized debt obligation bonds foisted on professionals at AAA when they were in fact BBB.

What has not been publicized was the SEC position under pressure from the elitists on Wall Street during the easy money period and the steep yield curve to exempt brokerage houses from the net capital rule. That as well led to leverage of 40 to 60 to one. If the banks could do it they wanted to be able to do it too to compete. That decision ultimately led to five failures. Even a mitigating gold standard could not have surmounted lack of regulation. After almost 50 years in the markets and a former brokerage house owner we know financial institutions should never be allowed to self regulate. If we have financial regulation we cannot have regulators who are friend s with the people they regulate. No revolving door between Wall Street and the regulator. The same goes for the revolving door between Wall Street and banking and Washington, particularly in the Treasury Department. Real interest rates will always rise in a period of monetary and fiscal profligacy similar to what we are now experiencing as a result of unbridled leverage.

Keynesians will tell us such financial discipline is not possible in the real world, but of course it is. They just want to perpetually break the rules. There is no such thing as a self-regulating monetary policy. Distortion reigns instead of a slightly expansive classical free-market model. Markets can be far more rational then they are presently if the players are not allowed to run wild, as we have seen since 2002. In addition a privately owned Federal Reserve should never be allowed to exist never mind take on government responsibilities, such as financial regulation, which is currently contemplated. The Fed has always subordinated monetary policy to the desires of Wall Street and banking and at times has bowed to political expediency. The Fed is responsible for every recession and depression we have had since 1913. The great market distortions are all a product of Fed decisions. The Fed is now using adversity to expand its empire, taking on the responsibilities of government when it should not be allowed too. Its power to print money and credit has to be ended. No more papering over their mistakes or willful arrangements with Wall Street and banking. Who caused the dotcom boom and the housing bubble, they did.

As we predicted long end interest rates are already telling us that their policies are flawed as Treasuries fall in value and yields rise, a reflection of coming inflation, as the same time the dollar is falling and gold and silver are rising. The Fed is in a box and they cannot get out. From a fiscal perspective we have had five administrations that have created tremendous fiscal debt. The damage done by the last two administrations was horrendous. Don’t forget as interest rates rise on debt service the debt gets larger and larger. These higher rates are already limiting any housing recovery and we see rates moving higher; at least to 4% on the 10-year Treasury note. That would translate into a 30-year fixed rate mortgage of about 5-1/2%. That rate will disqualify many borrowers as unsold inventory increases via further foreclosures that will last into 2012. That means further price declines. That will further destabilize the banking system. The unsold housing inventory in lenders hands and the value of CDO and ABS bonds will fall as well.

The answer is elimination of the Fed. Its powers would be returned to the Treasury, which would have to be transparent and the revolving door between Treasury and Wall Street and banking closed. The Treasury would have to run a tight ship limiting money and credit creation to 5% and by raising interest rates. The crisis has to be addressed eventually and the longer it takes the worse it will be. The power to run Washington by Wall Street and banking has to end. The connection has to be broken. Treasury and Congress have to start acting responsibility and the financial service sector will have to accept lower profits, lower bonuses and a smaller industry.

Credit default swaps have to be settled and banned and all derivatives regulated. There has to be a permanent cap on leverage at banks and brokerage houses of 10 to one and their underlying financial bases have to be changed and closely monitored. If we do not make these changes the financial system as we now see it is doomed.

Within 2-1/2 years Treasury short-term debt will be $16.6 trillion, or 110% of GDP. This is close to 1`21% of GDP attained after WWII, as Thomas Jefferson said, “Loading up the nation with debt and leaving it for the following generations to pay is morally irresponsible.” This is the kind of society we have today. This year foreigners will have to buy $862 billion treasuries, up from $724 billion. We don’t see that happening so the Fed will have to buy $1.5 trillion worth, perhaps more.

Legislation to give Congress greater oversight of the Federal Reserve has been severely watered down on the Senate floor in private negotiations between Sen. Charles Grassley (R-IO), the top ranking Republican on the Finance Committee, who wanted more oversight and Richard Shelby (R-AL).

The Grassley Amendment intended to give the Comptroller General of the Government Accountability Office power to audit any action taken by the Fed – the third undesignated paragraph of Section 13 of the Federal Reserve Act, which would be almost everything that the Fed has done on an emergency basis to address the financial crisis, encompassing its massive expansion of opaque buying and lending.

Handwritten into the margins, however, is the amendment that watered it down “with respect to a single and specific partnership or corporation.” With that qualification, the Senate severely limited the scope of the oversight. Richard Shelby was fully responsible for this course of action. Actions will be limited to specific companies. This modified version does not allow the GAO to look at all taxpayer risk. It in no way threatens the Fed’s monopoly on monetary policy and their secret independence. The list of Fed actions that can be probed are listed but they still could be knocked out in committee. They are:

1. Actions related to Bear Stearns and its acquisition by JP Morgan Chase, including:

a. Loan To Facilitate the Acquisition of The Bear Stearns Companies, Inc. by JPMorgan Chase & Co. (Maiden Lane I)

b. Bridge Loan to The Bear Stearns Companies Inc. Through JPMorgan Chase Bank, N.A.

2. Bank of America -- Authorization to Provide Residual Financing to Bank of America Corporation Relating to a Designated Asset Pool (taken in conjunction with FDIC and Treasury)

3. Citigroup -- Authorization to Provide Residual Financing to Citigroup, Inc., for a Designated Asset Pool (taken in conjunction with FDIC and Treasury)

4. Various actions to stabilize American International Group (AIG), including a revolving line of credit provided by the Federal Reserve as well as several credit facilities (listed below). AIG has also received equity from Treasury, through the TARP, which would also be captured in amendment #1020.

a. Secured Credit Facility Authorized for American International Group, Inc., on September 16, 2008

b. Restructuring of the Government's Financial Support to American International Group, Inc., on November 10, 2008 (Maiden Lane II and Maiden Lane III)

c. Restructuring of the Government's Financial Support to American International Group, Inc., on March 2, 2009

5. TALF -- finally, amendment #1020 would expand GAO's authority to oversee the TARP, including the joint Federal Reserve-Treasury Term Asset-Backed Securities Loan Facility (TALF)

*Neither* Amendment #1021 nor #1020 would include short-term liquidity facilities:

1. Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility
2. (AMLF)
3. Commercial Paper Funding Facility (CPFF)
4. Money Market Investor Funding Facility (MMIFF)
5. Primary Dealer Credit Facility and Other Credit for Broker-Dealers (PDCF)
6. Term Securities Lending Facility (TSLF)

Section 404 of the Sarbanes-Oxley legislation has been a bonanza for accounting firms. It has caused a high proportion of major foreign companies to de-list themselves from the NYSE and it has erected an artificial barrier to the globalization of capital markets. Thus, it isn’t all bad as depicted by corporate America.

The size of the commercial paper market, a vital source of short-term funding for daily operations of many companies, fell $3.6 billion to $1.245 trillion, from $1.248 trillion the previous week. Asset-backed CP outstanding fell 8.3 billion to $557.4 billion after falling $8.7 billion the prior week. The top was $2.2 trillion.

Mortgage rates surged 0.38%. The 30-year fixed rate was 5.29% up from 4.91%.

Sales were weaker than expected at 63% of the 30 retailers tracked by Thomson Reuters. The S&P retailers index fell 2.5%. May same store sales fell 4.8%.

The International Council of Shopping Centers forecast a 3 to 4 percent drop in June same store sales, down from 4.6% in May.

Freight traffic on railroads continued down for the week of 5/23 yoy, off some 21.5%, but up 4.9% week-on-week. Loadings were down 16.4% in the West and 28% in the East. Farm products fell 4.8% and metallic ores fell 59.7%.

Trailers or containers fell 19.1% yoy, and container volume fell 19.1% yoy, as trailer traffic fell 37.2%.

Year-to-date carloads are off 19.3% ytd and trailers and containers 16.8%. Total volume was down 18.2%.

Something that should be remembered is that in 1930 government bonds were used massively for capital safety. In 1931, investors had doubts and started switching to gold, which ran up in price forcing interest rates higher. This is what is happening today.

In 1930, there was no shortage of bank reserves and that carried into 1931. There were excess reserves and interest rates were very low.

The financial atmosphere in 1928-29 was the same as it was here in 2005 and 2006. It was a new era, nothing could possibly go wrong. The Fed refused to reign in cheap money and credit. Commercial paper rates were 1.25% and excess reserves increased four-fold. In the late summer of 1931 gold began its run. History is about to repeat itself.

Fed Chairman Ben Bernanke deliberately lied to Congress this week. The Fed and the NY fed pumped credit aggressively after the 1929 crash and for the remainder of the 1930s. The exception was 1932 when gold took its big run. Bernanke denied this and it is an historical fact. He also duplicitously told Congress the Fed will not monetize debt, but that is exactly what he is doing. Ben is part of the fascist propaganda machine. Tell a lie long enough and big enough and everyone will believe it. This can be called Fed speak. Big Brother would have been very proud of Ben and his fellow Illuminists.

Dick Cheney attempted to win support for harsh interrogation of 'suspected terrorists' by controlling the information Congress would receive on the matter, a report says.

In 2005, the former US vice president directed 'at least four' related briefings with Congressmen during which he would produce 'an impassioned defense' of 'enhanced interrogation techniques' -- the former administration's euphemism for torture, The Washington Post reported on Wednesday.

"This is a really important issue for the security of the United States," one official quoted Cheney as having told the lawmakers.

Officials, attending the meeting from the Central Intelligence Agency (CIA), with whom the program is associated, would also try quelling the Congressmen's concerns about the program saying the agency owed half of its information on alleged 'terrorists' to the methods.

The former top gun has produced an 'overrated' account of the security gains of the former administrations 'anti-terror' campaign.

He has claimed that the Bush administration's trademark 'war on terror' was likely to have saved "violent death of thousands, if not hundreds of thousands, of people" - an achievement which resembles that of World-War-II intelligence heroes.

The paper quoted Sen. Lindsey O. Graham (R-S.C.) as confirming Cheney's leading role in selling the program. "His office was ground zero. It was his office you dealt with at the end of the day."

Two more Iranian families accuse Blackwater, now known as Xe, of murdering their husbands and fathers in Baghdad and covering it up. Azhar Abdullah Ali, 33, a father of three, was a security guard for the Iraqi Media Network when Blackwater mercenaries killed him and two others on Feb. 7, 2007, according to the federal complaint. The family of Rahim Khalaf Sa'adoon claims drunken Blackwater mercenary Andrew Moonen killed Sa'adoon on Christmas Eve, "for no reason," as Sa'adoon guarded the vice president of Iraq.  The security guard family's complaint states: "The Sabah Salman Hassoon, Azhar Abdullah Ali, and Nibrass Mohammed Dawood are but one of a staggering number of senseless deaths that directly resulted from Xe-Blackwater's misconduct," according to the complaint.
Sa'adoon left two young children and his wife.
Named as defendants are Erik Prince, Prince Group, EP Investments LLC, EP Investments LLC, Greystone, Total Intelligence, The Prince Group LLC, Xe, Blackwater Worldwide, Blackwater Lodge and Training Center, Blackwater Target Systems, Blackwater Security Consulting, and Raven Development Group.
Both families seek punitive damages for war crimes, wrongful death, assault and battery, spoliation of evidence, and negligence. They are represented by Susan Burke with Burke O'Neil of Philadelphia.

Nonmanufacturing activity lost ground at a slightly slower pace in May, amid signs the sector may be preparing for recovery.

The Institute for Supply Management, a private research group, reported Wednesday that its NMI/PMI index stood at 44.0 from 43.7 in April and 40.8 in March.

That reading was below the 45.0 expected by economists. The ISM also said that its May business activity/production index came in at 42.4, from 45.2 in April.

The ISM report, which is comprised mainly of the service sector activities that make up the bulk of U.S. economic activity, arrives at a time when economic data are suggesting the recession may no longer be getting worse.

Factory orders rose in April less than expected, a barometer of capital spending by businesses plunged, and inventories fell an eighth straight month.

Orders for manufactured goods increased 0.7%, following a downwardly revised 1.9% decline in March, the Commerce Department said Wednesday. Originally, factory orders were seen dropping by 0.9% in March.

Economists had forecast overall April factory goods orders would rise by 1.0%. The report underscored the weakness of a sector that, while showing signs of improvement, is still limping.

Non-defense capital goods orders excluding aircraft decreased 2.4% in April after sliding 1.4% in March. Those bookings are seen as a yardstick for capital spending by businesses. Demand for durable goods were revised down to an increase of 1.7% in April. Last week, Commerce, in an early estimate, said durables surged 1.9% in April. Durables are expensive goods made to last at least three years, such as cars. Durables fell 2.2% in March.

Non-durable goods factory orders decreased 0.1%, after falling by 1.6% in March. A sign of future factory demand fell, down for seven straight months. Unfilled orders decreased 1.2% in April, after dropping 1.7% in March.

Business spending was atrocious in the first quarter of this year. Outlays fell by 36.9% January through March, after dropping 21.7% in the fourth quarter. The economy in those six months was dreary, with gross domestic product down 6.3% in the fourth quarter and 5.7% during the first quarter. Nearly half of that 5.7% drop was caused by U.S. businesses liquidating inventories to adjust for receding demand. The factory data Wednesday showed manufacturers' inventories in April dropped 1.0%, after falling 1.2% in March.

More liquidation could be in the offing. The latest Commerce Department report on business inventories showed the inventory-to-sales ratio was a relatively high 1.44 in March. The gauge indicates how well firms are matching supply with demand. It measures how long in months a firm could sell all current inventory. A year earlier, the I/S ratio was 1.28.

The government now has an equity stake in auto lender GMAC Financial Services after providing $12.5 billion in aid to keep loans flowing to buyers of GM and Chrysler cars, the Treasury Department said Tuesday.

The Treasury holds a 35.4 percent stake in GMAC, after exchanging an $884 million loan it made to General Motors Corp. for that equity under an earlier agreement.

GM filed for Chapter 11 bankruptcy protection Monday, a historic move designed to remake the automaker as a smaller and leaner company, that also made the federal government its principal owner with a 60 percent stake.

The government has a vested interest in seeing GMAC, Chrysler and GM succeed in order to recoup the billions in aid it has doled out to the companies. Analysts have suggested the federal support for GMAC will help make it a lending powerhouse that will give GM and Chrysler a big advantage over their competitors — including U.S. rival Ford Motor Co. — which hasn't taken government aid.

Mortgage rates rose sharply last week, and the volume of mortgage applications filed fell a seasonally adjusted 16.2% compared with the previous week, the Mortgage Bankers Association said Wednesday.

Applications were up an unadjusted 14.4% for the week ended May 29 from the comparable week in 2008, according to the Washington-based MBA's survey, results for which were adjusted to account for the Memorial Day holiday.

The latest survey, which covers half of all U.S. retail residential mortgage applications, mirrored a similar pattern for mortgage filings seen in the week ended May 22.