International Forecaster Weekly

One Third Of The Wealth Of The World Controlled By Less Than One Percent

One third of the wealth of the world controlled by less than one percent, housing slump continues, IMF believes what it wants when it comes to wealth creation, ethanol plans stalled, Bear Stearns massive layoffs, Iran continues its move to Euros, gold and silver rallies, subprime troubles

Bob Chapman | October 6, 2007

We are sure all of you are anxious to know that the numbers of millionaire households globally grew by 14% in 2006 from 2005, and now control a third of the estimated $100 trillion in wealth. The 9.6 million households, comprising 0.7% of the world’s households, now control $33.2 trillion. Half are located in the US and Canada, 25% in Europe and 1/5th in the Asia-Pacific region.

In non-wealthy households, defined as those with less than $100,000 in financial assets, declined from 2001 to 2006. But, assets held by households with more than $100,000 climbed from $51.4 trillion to $84.5 trillion during the same period. The richest 0.1%, those with more than $5 million in assets under management own 17.5% of global wealth.

Planned layoffs fell nearly 10% in September as the slump in housing continued to hurt payrolls. More than 1/3 of the cuts of 71,739 came from mortgage lenders, construction firms and real estate firms. Thus far this year, about 1/6th is directly related to a collapsing housing market.

IMF data says it is mostly central bank flow of funds that is keeping the world economy afloat despite all the recent attention granted to sovereign wealth funds the central banks of the world’s emerging economies accounted for $320 of the world’s 340 billion in reserve growth in the second quarter and $283 of $303 billion in the first quarter. In the end central banks are financing the entire US deficit.

Twenty-seven percent of hiring managers said they planned to increase their staffs in the last three months of the year, down from 32% who said they expanded their payrolls in the third quarter and 41% in the second quarter. The job market has weakened measurably since the spring and will weaken further through the end of the year. Six percent said they expected to cut staff down from 9%, 63% will leave there staffs as is.

ADP says employer’s likely added 58,000 jobs in September. In September employment in construction fell 20,000, the 12th decline in 13 months, bringing the cumulative decline since 8/06 to 157,000, but this does not count the massive layoff of 300,000 plus illegal aliens.

Ethanol plants in the Corn Belt are stalled for now, thanks to soaring construction costs compounded by high corn prices that have swelled operational expenses. The sliding price of ethanol hasn’t helped either. Plant construction has stalled as the price of ethanol has slid 30% and stands at $1.60 a gallon. The prospects of a glut loom as demand now is less than 7 billion gallons and production next year will be 12.4 billion gallons.

Federal prosecutors and the FBI have opened an investigation into whether criminal misconduct was involved in the collapse of American Home Mortgage.

Bear Stearns is cutting another 310 jobs in its mortgage origination businesses. This brings cuts up to 40% of staff.

The MBA reports mortgage application fell 2.7% last week. Applications for home loans to refinance fell 3.8% versus the prior week. The 4-week moving average for all homes was up 0.5%. Refis accounted for 46.0% of overall mortgage applications, down from 46.4% the prior week. Apps for ARMs made up 138% of total volume, up from 12.2%. The interest rate on the 30-year fixed rate mortgage was 6.32% versus 6.38% the previous week. The 15’s were 5.95% down 9 bps and one-year ARMs were 6.21%, up from 6.09%.

Iran has slashed its use of the dollar in payment for its oil exports to 15%, due to growing pressure from George and the neocons. Most are now carried out in euros, some 65% and 20% in yen. Iran is the world’s 4th largest oil exporter, so the event is significant.

August factory orders fell 3.3%, the largest fall since January. Orders for core capital gods fell 0.5%. Shipments fell 1.6%, inventories slipped 0.1%. Unfilled orders rose 1.2%. Orders for durable goods fell 4.9%, while orders for non-durable goods fell 1.6%.

The Street is betting the FOMC meeting this month will bring lower interest rates. That is based on lower economic numbers, a continuing credit squeeze at banks and Greenspan’s comment that the real estate crisis and house prices will fall a lot further than people think. Cheap money is now history. The days of big leveraged buyouts are over because the CLO market is dead. Banks won’t lend to each other for more than a week. The current situation is more systemic than the crisis in 1998. It effects far more institutions and will have a far greater impact on the global economy. Those who believe we will get a recovery as in 1999 are mistaken. We are facing a property collapse and hyperinflation. This is also worse than October 1987. This time the dollar has hit record lows and gold and silver are rallying in spite of official suppression. This is January 2001 all over again or October 1929. The US is the biggest debtor in history with external liabilities reaching 35% of GDP. Foreigners are not buying our Treasury paper and that means the Fed will have to buy the bonds, monetize them, and we will have even more inflation. Dropping interest rates won’t work – only a purge will and the elitists do not want to face that. Thus, they will inflate until they cannot anymore.

Trim Tabs and Barclay Group estimate that in July $39.1 billion flowed into hedge funds and that August saw an $8.9 billion inflow. We might add that we do not believe these estimates and believe them to be bogus. They had previously estimated a July outflow of $32 billion. It is impossible for professionals to be off by $71 billion. They must think we are dumb.

Metro Atlanta’s mortgage delinquency rate, at 5.07% in the second quarter of more than 1 million mortgages, was the highest since the first quarter of 2000, when it was 2.66%.

The week’s initial jobless claims rose 16,000 to 317,000. The 4-week moving average increased to 312.750 from 312,250. The number of people continuing to collect state unemployment benefits fell to 2.541 million versus 2.551 million.

Mortgage companies are being overwhelmed by the large numbers of homebuyers who need to renegotiate their loans to avoid default, creating a subprime traffic jam that could destroy efforts by regulators to prevent foreclosures.

Mortgage Services, the operations that collect loans, say they are having trouble making profits because of record levels of late payments and delinquencies. Costs have increased 20% in the last year.

The result is few subprime mortgages are being renegotiated. This will become titanic over the next few years. Those that are lucky enough to reset are looking at payments increasing 30% to 50%. A monumental pile-up lies ahead and that means more than necessary foreclosures. We expected and predicted this, and that is why 50% of these loans will fail.

Citigroup is in talks with KKR to provide financing to buy some of the leveraged loans on its balance sheet. It has also talked to other private equity firms about providing such funding. KKR will use the funds for an existing hedge fund to buy leveraged loans and other impaired debt.