International Forecaster Weekly

Still In A Credit Crisis, New Liquidity Threatens Inflation

Market manipulations never fail to shock us, 13 trillion spent into a pit of debt and no relief in sight, unemployment numbers probably higher than they appear, crooks bailed out, taxpayer pays for it, bank lending way down, inflation predicted

Bob Chapman | January 6, 2010

On thing we can say for sure about 2009 is that markets witnessed the worst manipulation ever by the President’s “Working Group on Financial Markets.”

Over a 15-month period ending 9/30/09, together the Fed and Treasury borrowings were $2.81 trillion. This has been the greatest creation of financial aggregates in history. This tidal wave of money and credit was accompanied by just above zero interest rates. Then there was the Fed’s trillion-dollar purchase of toxic mortgage securities, which the Fed refuses to tell us what they paid for them and from whom they bought them. Total monetization has been well over $2.3 trillion that we know about. The freeing of toxic mortgages reliquefied balance sheets and markets and allowed mortgage finance to remain low for residential real estate for refinancing, most of which was guaranteed by US taxpayers, by the bankrupts known as Fannie, Freddie, Ginnie and FHA. We might add that our government started the subprime crisis all over again over this past year by handing out marginal mortgages to reduce residential inventory held by banks. Government admits they will probably have 25% foreclosures. We estimate them at more than 50%. When the truth is finally known guarantees are probably in the realm of $700 billion to a trillion dollars. Once government discontinues this very expensive support, prices will again fall and inventory will again rebuild.

The Treasury and the Fed have poured almost $13 trillion into the economy and haven’t made a dent in the problem of bad debt. They just transferred the problem to the taxpayer. In that process the banks and brokerage houses dispensed ever-bigger bonuses as a tribute to their incompetence and failure. The result for the economy recently has been a bogus 2.2% growth rate in GDP for the third quarter. Mind you, the first release was 3.6% and the second one was 2.8%. Does anyone really believe they got it right the third time? This is how government and Wall Street massage the market to keep it from falling. It is like all of their statistics, they are all stamped bogus. That 2.2% was the first supposed growth in a year.

Unemployment numbers are a joke. U3 is said to be 10%, but U6, which is conveniently obscured from view, is 17%. If you strip out the birth/death ratio you get 21.9%.

The result of this tremendous infusion of money and credit has been the survival of banking, Wall Street and insurance, and a fall in household net worth of almost $7 trillion. We’d call that an uneven, unbalanced performance. The culprits have been bailed out and the public has paid for it. The next natural question is what will the Treasury and the Fed do for an encore? The treasury is running a $1.7 trillion deficit, and is the go to source for employment. The Fed says it is going to withdraw liquidity from the system and that they intend to raise interest rates in July or there abouts. If this is the case you had best prepare for a deflationary depression. We do not believe the Fed for one second. Do they really believe this will save the dollar? We do not think so.

Almost every country in the world has done, in varying degrees, what the US has done and that is create large amounts of money and credit. The result is that all currencies have fallen versus gold, which just happens to be the only real money. As currency deterioration has continued over the past ten years there has been a drift away from financial assets to hard assets, which is a natural response. This is part of the past bubble phenomenon, which will continue to offset inflationary loss and to serve as a flight to quality. The result of the foregoing is that the US dollar has continued to lose value versus other fiat currencies.

We now have worldwide stock markets recovering the 50 to 60 percent they lost in early 2009. In the US we can call it the TARP rally. China has poured $1.8 trillion in stimulus into its economy and has a new stock and real estate bubble with nasty inflation on the way. Chinese citizens are not only buying gold and silver, but now diamonds as well - anything to get out of the dollar and get into something tangible. The Chinese bubbles are in the early process of collapsing. They are going to suffer the same fate as Japan and the US. China will need those $2.3 trillion in foreign reserves to bail itself out. That is sure to put lots of dollars up for sale.

During 2009 we saw an exodus of liquidity from money market funds most of which went into Treasuries. A drop from almost $4 trillion to $3.3 trillion in good part caused by low yields and the abandonment of government guarantees on 9/18/09. Some of those funds went into the market, gold, silver and commodities, but the bulk of it went into Treasuries, which was the motivation for government to drop those guarantees.

Banks have reduced lending in 2009 by about 18% yoy and we do not expect any changes in 2010. The zero interest rate policy has only benefited banks and other speculators. Part of the TARP funds may have gone on interest bearing deposits, but a good part went into market speculation. The riskiest stocks, bonds, junk bonds and CDOs were the overwhelming choice. Unfortunately bank and brokerage leverage is still 40 times assets. Fortunately, they are not long gold and silver related assets, so we see no fallout in that venue as these crooks are forced to finally de-leverage. Even though insolvent these financial institutions will not be forced to stop using two sets of books. When the Fed falls, they will fall.

The last fallacy is that there is stabilization in the system. We are still in a credit crisis. The Fed and other central banks will stop monetary restriction and stop raising interest rates, when they see a deflation has them by the throat. That doesn’t mean real interest rates won’t rise, they will. Leverage will soon come to a halt as financial entities start losing money again. It will be a very difficult year in 2010, as the excesses of 2009, to save the system unwind.

The probability of 14% inflation in 2010 has already been baked into the cake. The Fed and other central banks are really trying to avoid hyperinflation. The real trouble will come in 2011. If the Fed and other central banks cannot raise interest rates, cannot reign in the liquidity in their economies, and need further stimulus, which we believe will be the case, then inflation will run wild. As a result gold and silver prices will go through the roof.

That leads us to our latest information gleaned through private Fed meetings. They believe the period between July and October is when the financial fireworks will begin. The Fed will act unilaterally for its own survival irrespective of any political implications. In the last quarter of the year we could even see Martial law, which is more likely in the first six months of 2011. If Congress passes any kind of health care, the public will go ballistic and be prime for revolution. Our position is that bank lending will not improve nor will unemployment. If this is accompanied by official devaluation and default everything could break loose. The elitists realizing this will arrange another 9/11-type event with the usual cast of characters and we expect conflict will spread into Pakistan and that Israel will attack Iran enveloping the Middle East in flames. That would send oil prices considerably higher and cause a collapse of world stock markets, with the exception of gold and silver shares. The excuse to impose Martial law would be apparent. The country could go into lockdown. Transportation could be limited, food and gas rationed, banks closed and many other major inconveniences. The current mainline media, Wall Street and governmental propaganda about economic recovery would end, they never having to prove that a recovery ever existed. During the first six months of 2010, Americans and others will continue to live in their world of inreality. These hopeless fools are again being taken down the garden path. The world as we know it is about to change dramatically, so prepare for it.

In the meantime we observe that foreign exchange reserves denominated in US dollars has fallen from 64.5% to 61.8% in the last six months of 2009. This represents huge sales of dollars most of which was in the form of Treasury and Agency bonds. China has for some time been a major seller of Agency paper and a moderate buyer of very short-term T-bills. That has kept China’s dollar denominated portfolio at about $1.8 trillion. In addition as China has publicly stated the world has run out of enough dollars to service public debt. That means more Fed monetization, perhaps on a level of more than $1 trillion a year. That means hyperinflation, because the elitists won’t be ready, as yet, to pull the plug on the economy and plunge into deflationary depression. They have to increase terrorist events and world war on a parallel basis, so that all strike at the same time. This way they can blame the economic financial problems on the enemy who would be responsible for this horrible war. These are all the reasons for having freeze dry and dehydrated foods, a water filter and a method of defending your family as a first line of defense. All other funds should go into gold and silver coins and shares. For 20 years of publication we have been correct 98% of the time, thus, a word to the wise should be sufficient. If you do not follow these instructions your lives will be in peril. The bottom line is the Fed has no choice but to monetize and that means inflation is going to spiral out of control. You have to be prepared.

As this unfolds all currencies will fall versus gold and silver as they have for the past 6-1/2 years. Being long any currency is foolhardy. You should only have enough for three months operating expenses as a family and six months for business. No CD’s, cash value life insurance policies or annuities. Many insurance companies will go under and as a result not pay off. Things are not the way they seem to be. Nothing that emanates from government, Wall Street, banking and corporate America is to be trusted, it is 80% disinformation. That is why we do 30-hours of radio programming a week and publish 100 pages in the IF. We know we are one of just a handful of people in the world trying to bring the truth to the public to save them grief and perhaps their lives.

In the next 1-1/2 years we expect the US to officially devalue and default along with many other countries. There will be emergency meetings, one after another, as governments attempt to cope with, internal debt and a collapsing financial system. Not one government is attempting to solve the problems, only treat the disease. The system has to be purged as soon as possible and as an interm alternative the US dollar has to be abandoned as a world reserve currency, and replaced by the weighted currencies of the G-20, backed by 10 to 15 percent in gold. Later the gold reserve can be increased to 25 to 30 percent. That will put gold prices somewhere north of $10,000 an ounce. We now know that real inflation, since 1980, justifies a price between $6,700 and $7,150, but with hyperinflation on the way, who knows where the top price will be. As you can imagine we are probably two years away from currency controls. That means government permission to move assets in or out of the country. That means if you choose to keep assets in a foreign place you should be prepared to go and live with them, otherwise keep them at home for better or worse. On the other hand government may force you to repatriate assets, whether you like it or not and then dream up a new tax on them or even confiscate them.

Remember, irrespective of what the media, government and Wall Street tells you, we are already in a depression and we have been for almost a year. 21.9% unemployment, that will be 23% after February, denotes a depression and all the lying by these entities is not going to change this.

GMAC Gets Third Bailout Package - Property Week (01/04/10)

Having twice received assistance from the U.S. government, GMAC
has received a third stimulus package valued at$3.79 billion that gives taxpayers a controlling interest in the firm. The cash infusion will boost lending at Detroit-based GMAC as it absorbs

$3.8 billion in new pretax charges and contemplates the fate of its struggling mortgage arm.

Manufacturing expanded during December, according to a report suggesting strength in the factory sector's recovery.

A separate report Monday said U.S. construction spending in November fell.

The Institute for Supply Management's index of the nation's manufacturing activity rose to a better-than-expected 55.9, from 53.6 in November.

Readings above 50 indicate expanding activity. The data showed the manufacturing sector grew for a fifth consecutive month.

The rebound...should restore some faith in the sustainability of the industrial recovery, Capital Economics analyst Paul Ashworth said.

The ISM's new orders index increased to 65.5 last month, from 60.3 in November. The production index rose to 61.8 from 59.9.

Construction spending tumbled in November more than expected, pulled lower by the housing and commercial sectors as the recovering economy deals with high unemployment.

Spending fell 0.6%, at a seasonally adjusted annual rate of $900.08 billion compared to the prior month, the Commerce Department said Monday.
Spending in October was adjusted down, falling 0.5% instead of remaining flat as reported originally. Year over year, spending was down 13.2% from November 2008.
Economists surveyed by Dow Jones Newswires estimated outlays would decline 0.2% in November.

Spending in November on residential construction projects fell 1.6% to $258.9 billion. Residential spending in October rose 4.5%, adjusted from an originally reported 4.2% increase. Year over year, residential spending was 19% below the November 2008 level.

Commercial construction fell in November. Outlays on non-residential projects decreased 0.2%. Spending dropped for hotels, office buildings, roads, and schools. Year over year, spending for commercial construction was down 10.9%, as office vacancy rates have climbed with unemployment.

Construction spending in the private sector during November decreased by 0.7% to $581.3 billion. Spending fell 0.8% in October.

Federal Reserve officials are considering a proposal to schedule limited sales of bonds from the central bank’s $2.2 trillion balance sheet as part of a range of tools for withdrawing record monetary stimulus.

The Federal Open Market Committee discussed asset sales at its November meeting, with some members in favor and others warning that it would cause “sharp increases” in longer-term interest rates, according to minutes of the meeting released Nov. 24. A middle route now being studied would allow small amounts of bonds to be unloaded at announced times.

“The attitude toward asset sales is changing in terms of more in favor and more open minded, and doing it very gradually,” said former Fed Governor Laurence Meyer, vice chairman of Macroeconomic Advisers LLC in Washington. Devising a plan for pulling back stimulus “is under way intensively on the Federal Open Market Committee,” he said. [A big question is how much money is the taxpayer losing on these transactions?]

Then on Dec. 14, he went to work as head of new investment initiatives at the Pacific Investment Management Company, or Pimco, the powerful bond investment company based in Newport Beach, Calif., whose top executives have boasted of their access to government officials. Alan Greenspan, a former chairman of the Federal Reserve, is among its consultants.

But even though Pimco was not a recipient of government aid, Mr. Kashkari’s career move raised eyebrows. Bloggers joked about how — in their view — he had all along been doing the company’s work in Washington.

During the crisis, William H. Gross, the founder and co-chief investment officer of Pimco, who is known for his witty letters to investors and his appearances on CNBC, frequently offered advice to the Treasury about how to handle the bailout.

At the same time, Pimco’s publicly stated strategy was to invest money in areas that would benefit from the government’s rescue efforts. The company called this its “shake hands with the government” plan. Outsiders consider Mr. Kashkari’s addition a natural strengthening of Pimco’s ties to government. [Pimco is nothing less than an appendage of government.]