International Forecaster Weekly

Massive Imbalances In World Economy Still Tipping Us Downwards

life with the Dow in a different place, massive money injections fail to boost CPI, warnings of a Weimar republic, and risks of budgets, Fed to supply smoke and mirrors, TARP bailout enriches speculators at public expense, Chrysler and UAW dont get such a good deal as TARP counterparties

Bob Chapman | May 16, 2009

We have come a long way from Dow 14,168 and we have just completed a strong bear market rally based on little but hopes, dreams and the assistance of the “Working Group on Financial Markets” under the guidance of the Treasury and the Fed. We believe the bear market has a substantial distance to fall as the debt sector is purged. A 50% retraction of debt, which is far above GDP has to be completed, excess capacity has to be rung out of markets, consumer spending, which is now 70% of GDP, has to return to the long-term average of 64.5% of GDP. Once real estate bottoms in 2011 and 2012, we will probably be half way to the overall bottom. We have 2/3’s of the way to go before credit card debt is purged. We are just beginning to see failure of commercial and industrial loans and that could last another 3 to 4 years. Presently we are about 40% to the bottom. Then the question arises how long do we bump along the bottom – probably 5 years or longer – dependent on how bad the structural damage is, whether we still have a Federal Reserve; how many banks are left; whether we have WWIII or whether we have revolution. America and the world are in for a difficult time.

There are still massive imbalances in the US and world economy. Fiscal and monetary policies in almost all countries have gone over the edge. In a panic to subdue deflation governments and central banks have way overused fiscal and monetary policies, which is sure to end in hyperinflation. Any natural pause or mini recovery is doomed by the massive amount of monetary aggregates racing through the system. Over the next year and one-quarter negative GDP of 6.3% from the last quarter of 2008 should rise to even. That is no negative growth in the fall of 2010.

In spite of massive injections of money and credit worldwide the consumer price index fell to its lowest level since 1955. Those of course are US Labor Department figures. Inflation is still persistent at 9% and M3 is back to 18% annualized. Capacity utilization is 69.3%, the lowest since 1967, which means few businesses have profits. A reflection of that is that state and local taxes have fallen more than 7%. Personal income taxes are off over 1% and corporate taxes more than 15%. 80% of states have had a more than 13% decline in tax receipts year on year. Credit card balances are down more than 10%. It would be very helpful if our federal government would stop lying about our statistics.

S&P says companies cut $77 billion in dividends in the first quarter and that is worse than during the Great Depression. That is part of the reason we declared a depression in February. At the end of the first quarter federal tax receipts fell $50 billion to $129 billion. Individual tax receipts fell from $57 billion to $41 billion. Corporate tax receipts fell 90%.

It is important to note that the S&P 500 Index fell 57%, a larger decline than the 48% decline of 1973-74, or the 49% fall of 2000-2002. This time it took 17 months for the S&P to reach those levels whereas the other two drops took 21 to 31 months. From 1929 to 1932 the market fell 89%.

Prior to the beginning of the recent fall and that of 1929 both events occurred after a long period of optimism. Most observers do not believe that this depression will be accompanied by global protectionism, nor do they see ultimately a deflationary depression and price deflation. How can they be so near sighted? The Fed and the Treasury cannot inflate indefinitely. The events we’ve witnessed and continue to witness, and those that we project, can only lead to hyperinflation and then deflation. Since 2000 these forecasts have been easy and we’ve been right, but few else have. They are all bound up in what is financial and political correctness. We are going to 3,800 to 4,200 and we’ll be lucky if it stops there.

The massive creation of monetary aggregates, that is money and credit, is leading us toward a Weimarite monetary policy and hyperinflation, as well as higher interest rates. Both will lead to killing any economic or financial recovery. We hope the “Peoples Republic of China” is listening. If they are not their losses will be grievous and painful. This means it will be many years before housing recovers. Growing foreclosures for another three years and massive inventories. This means no economic recovery for years to come. Eventually deflation will take hold and then the real misery will begin.

On the near term the Dow will return to 6600. Looking for another rally there will be buyers, but the rally will not appear again and we’ll fall into the 5,000 to 6,000 level. Higher real interest rates will win out as will hyperinflation; at least for a time. Consumer confidence may be somewhat ebullient now, but once further signs of higher inflation manifest itself that confidence will fall again. The same will happen with capital investment.

Rumor reaches us that Citigroup’s London subsidiary lost $30 billion and it is failing. Word is the Fed has already stepped in and is covering the bad collateral.

Incidentally, Stephen Friedman recently cashiered from the NY Fed has returned to his roost at Goldman Sachs. He was caught in a conflict of interest after having purchased 52,600 shares of Goldman on inside information. It is now very obvious Goldman Sachs controls our country. The only mission of the Fed is to rescue banks, brokerage firms and insurance companies.

Notable in the inventory report, inventory fell 1%, but sales fell even faster.

Watch out below. For the fourth time Sir Alan Greenspan, who sold his soul to the forces of darkness, says it is easy to see the financial markets and the housing markets have bottomed. If you want to lose money just follow his advice. We cannot believe this idiot ran the Fed for 21 years.

John Taylor, a former undersecretary of the Treasury for international affairs slammed the Fed for risking hyperinflation and warned that government action will caused, a prolonged and worsening of the country’s financial crisis.

He says it won’t be long before the Fed removes excess reserves. Classically that would be the case, but this time they cannot. If they do the whole house of cards collapses. He says the risk is systemic.

We see much more risk coming from the planned US government budget deficits, which will place the Fed under extreme pressure to allow further inflation, in order to diminish the Treasury’s debt burden. Of course, that process robs the dollar holders of their buying power. It is called stealth theft.

Budget deficits should end and that would end the Fed’s extraordinary monetary policy actions. As we all know nothing like that is going to happen.

The Fed cannot insure the soundness of the broader financial system and at the same time ensure stable and low inflation and sustainable economic growth.

In order to avoid this we now understand a systemic risk regulator will be ensconced at the Fed, which is more smoke and mirrors. The Fed, and the Bush administration, is responsible for all of this and the Fed should be disbanded and their functions turned back to a Treasury that is not run by Wall Street and bankers.

Former Comptroller of the US, David Walker, says the US is at risk of losing its AAA rating. 64.5% of the foreign exchange of all countries is in dollars, which makes all their currencies fiat. The only real currencies in the world are gold and silver. They deserve the AAA rating.

Retail sales fell .4% in April. That means lots less tax revenue and profits. The powers that be figure if you lie long enough and loud enough people will believe everything is ok. Well, it is not ok as the 19.2% unemployed increases.

The Obama administration is about to close the barn door and regulate derivatives and exotic financial contracts, that have destroyed our financial system.

If they are going to do that their first action should be to dismantle JP Morgan Chase’s massive derivative concentrations shorting gold and silver.

Sheikh Hamad bin Jassim bin Jaber a-Thani will invest as much as $20 billion a year and says, “we will look at food, we will look at gold and at minerals.”

Obama administration officials are contemplating a major overhaul of the compensation practices in the financial services industry, moving beyond banks to include more loosely regulated hedge funds and private equity firms.

Any overhaul is likely to be tied the Obama administration’s broader efforts to curb systemic risk to the economy. That means the new rules could apply to financial firms like hedge funds or private equity firms that never accepted money from the Troubled Asset Relief Program, or TARP.

Treasury officials have said new executive compensation rules could be released shortly, with some bankers and lawmakers expecting them to be formally released before the Memorial Day recess.

The Obama administration's behavior in the Chrysler bankruptcy is a profound challenge to the rule of law. Secured creditors -- entitled to first priority payment under the "absolute priority rule" -- have been browbeaten by an American president into accepting only 30 cents on the dollar of their claims. Meanwhile, the United Auto Workers union, holding junior creditor claims, will get about 50 cents on the dollar.

The US Treasury’s effort to stabilize the banking system through the TARP programme is a hopelessly ill-conceived policy that enriches speculators at public expense, according to the buy-out firm supposed to be pioneering the joint public-private bank rescues.

“The taxpayers ought to know that we are in effect receiving a subsidy. They put in 40pc of the money but get little of the equity upside,” said Mark Patterson, chairman of MatlinPattersonAdvisers.

The comments are likely to infuriate Tim Geithner, the US Treasury Secretary, because MatlinPatterson took advantage of the TARP’s matching funds to buy Flagstar Bancorp in Michigan. His confession appears to validate concerns that the bail-out strategy is geared towards Wall Street.

Standard & Poor's said the nation's banking crisis has "merely entered a new phase" and might not end before 2013.

John Williams notes: Obama administration Changes Rules in Order to Reduce Reported Deficit Level. Under mounting global criticism for its fiscal excesses, and with Treasury auctions looking like they are going to need heavier Federal Reserve support, the Obama administration has taken some "corrective" action, by changing the accounting rules for the reporting of federal deficit. The changes only reduce the reported level of the federal deficit; they do not impact the Treasury’s excessive funding needs. The "Highlight" of the (May 12th) Monthly Treasury Statement for April 30, 2009 was:

"The administration has reclassified prior month expenditures related to the Emergency Economic Stabilization Act (EESA- also known as TARP). Consistent with statutory requirements of the Federal Credit Reform Act and EESA, TARP purchases are now being accounted for on a net present value basis, taking into account market risk. Accordingly, budget outlays have been reduced and direct loan financing activity correspondingly increased by $175 billion."

John also notes, “Incorporating annual revisions that knocked a percent or two off reported sales levels of the last two years, the annual 10.1% decline in April 2009 retail sales was the worst seen in post-World II history, other than for a 10.6% decline in December 2008.”