International Forecaster Weekly

The Fear That Fed Money Brings

US influence on decisions made in Europe, battle over a bailout, more quantitative easing, Fed as the instrument of liquididty, Ron Paul wants to abolish the US Federal Reserve, countries rushing to sell bonds, France fears downgrading, magnification of debt, Greece default still a worry.

Bob Chapman | January 11, 2012

The hand of the US elitists shows more each day in the decisions being made in Europe. Mario Draghi, ex-Goldman Sachs, Trilateralist and Bilderberg, is putting everything in place just the way the US elitists want. We are about to see full scale quantitative easing. One trillion in loans times fractional lending of 3 to 9 to whatever will give Europe the funds it needs indefinitely. Europe is going to be a rerun of what we have seen in the UK and US. In behalf of German voters who are 65% against such funding, Chancellor Merkel has refused to allow issuance of Eurobonds or an expansion of the EFSF. Draghi at the head of the ECB is now putting pressure on Mrs. Merkel to drop back to a more defensive position. The intrigue is at its height. If Frau Merkel gives into Draghi she and her party will not score well in the next election and may even lose political control. That could cause Germany to consider leaving the euro, which would destroy the euro zone. There are major dangers here and all the players are well aware of it. Agreement will take time and if it is not reached everything could short circuit, other than the fact that the Fed has put the funds in place. The other objective of getting Germany to whole-heartedly accept the bailout and stimulation is another matter. Confusion reigns even among the participants. The US, UK, France and their front men, Draghi, Monti and Papademos are all moving forward. The price will be very high from an inflationary standpoint, but to the elitists that isn’t even a consideration. They could care less. That is why you want to have your assets invested in gold and silver related assets. We could be headed toward another Weimer episode.

What we are seeing worldwide is another expansive use of money and credit creating better known by the euphemism, quantitative easing. In June, the Fed will announce its latest version that has been secretly underway for the past few months. The Fed is the instrument of liquidity, because it is appointed. By using the Fed everyone’s covered politically. That lets the political types slide into the election not having to be worrying about finances and the economy. It will all be designated the Fed’s fault. This will do the Fed lots of damage. If Ron Paul is elected president these actions could lead to the Fed’s demise. Long-term unemployment is still about the same and the housing situation is worsening, not improving. U-3 unemployment figures at 8.5% are almost meaningless. It is U-6 that counts less of course the birth/death ratio and that is 15.2%, or real unemployment of 21.5%.

This past week the euro hit its lowest level versus the dollar in 15 months. Investors certainly see the short-term positives of more than a trillion dollar injection to the banks and sovereigns of Europe, but they are looking beyond that. They see major long-term damage to the euro caused by this massive injection of new liquidity. Unless there is a breakdown in Greece, or another European sovereign, the euro should make it in 2013. That may be so, but banks that just borrowed $850 billion from the ECB have re-deposited $587 billion of those funds back with the ECB. That means only $263 billion was used in other ways, or about 15%. Normally banks would lend overnight to other banks, lending banks do not trust other banks, hence, the massive deposits at the ECB. The lending is for three years or less at 1%, but this program may go on indefinitely as perhaps the programs in the UK and US will as well.

In addition to this really open ended financing many countries are rushing to sell bonds, as $90 to $100 billion has to be refinanced in Europe. That is $203 billion in just the first quarter.

The European bond market is looking at Greece, which wants Greek bondholders to take a 60% to 75% haircut. Sixty percent of those bonds are held by banks and about 40% by hedge funds that will take large losses. In the case of new bond sales they should not sell to private investors. If they sell to sovereigns the debt burden will be smaller and hence the total bill.


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In Italy citizens want the corruption by the politicians ended. Austerity for everyone except them. Some are making $26,000 a month, as the average Italian makes $2,600 monthly.

In France the bankers, bureaucrats and politicians are all worried about France being downgraded, not one level, but 2 levels and that is understandable. What should really be frightening them are the two elections for the presidency in April and May. If Front National and Marine Le Pen, were to take the presidency Europe’s Illuminists would be staggered. Miss La Pen has stated if she is elected they’ll be no more euro zone or EU for them. They obviously do not take her possible presidential bid seriously. The bond market is already treating France as if they already had been downgraded, or that Le Pen had already defeated President Sarkozy.

The pros still are debating the solvency of the euro zone and the fact that at least $6 trillion is needed for the system to survive.

The elitists, very mindful of the challenges they face, scrambled via the Federal Reserve to lay the groundwork for another temporary rescue of European banks, as the Germans produced the cash flow and credit for the temporary rescue of the six recalcitrant sovereigns. The swap, an illegal loan, by the Fed could keep the banks afloat for years, using fractional banking. The EFSF funding is another matter. $600 billion is one-tenth of what is needed just to keep these countries solvent. European banks have now assumed the same mode of US and British banks - broke but still operating, thanks to never ending loans from the Fed. Every time any of these banks spend money, or lend reserves, it becomes an inflationary event. The financial world of post 1944 is over. Now it is inflate or die. The success of this period was built upon stunning government debt, which is now in the process of reaching saturation over the next five years. As a result stock and bond markets have held their own and then some, and even with government manipulation gold and silver prices have more than doubled. When finally let loose in a free market both gold and silver prices will explode. 

Today we see the magnification of unpayable, massive government debt, zero interest rates for banks, not the public or corporate borrowers, and bank monetization, which governments as a matter of normal course lie about. What we have just seen in the banking rescue in Europe is a forestalling of a current crisis, which will lead to greater crisis down the road in the future. Our experience over the past 53 years has been that the policy makers always had leeway to make changes, but they now are down to crunch time. This is the last straw. If flooding the world with money and credit doesn’t work this time, and it won’t and they know that, then it is war for a cover. That is why you are seeing, what you are seeing in the Persian Gulf - a distraction and a prelude to war.

Financial crisis has always been a probable outcome and it has been since the early 1960s. We saw illegal market manipulation, particularly in gold in 1952, 1967-69 and again in 1977 to 1985. President Reagan’s Executive Order creating the “President’s Working Group on Financial Markets,” which ended free markets and ushered in a new era of total financial market manipulation. Everything the participants do is in secret and in fact unless you researched the subject you would never know it existed. It is only occasionally mentioned in the financial media, because it is forbidden to do so. If you breach that prohibition you never appear on the mainline media again. During the 1970s and 80s we did thousands of TV appearances, but no more. We are banned, because we tell the truth. This is how the elitists get away with this secrecy. The major players are the Fed, the NYC Fed – the Fed’s financial arm, and the Treasury via the Exchange Stabilization Fund. This is how all markets are manipulated 24/7 and 99.8% of the American public is unaware of it. What you have seen since the early 1960s was a guaranteed high probability outcome further driven by the end of gold backing of the dollar on August 15, 1971, a day that will live in financial infamy. Thus, in essence crisis has been with us for more than 50 years and this portion of that crisis could become a very dynamic closer as massive monetization and inflation is let loose. We are at the stage now that risk is growing exponentially, as central banks and governments aggressively intervene into markets causing major distortions. These actions set the stage for heretofore-unexpected events, now called “black swan” events.

The recent moves into the European markets by the Fed, as we predicted in 1992, will only delay the inevitable. The euro will fail. We just do not know as yet when. The euro has been in disintegration for years. Could its demise happen this year? Yes, it could. We don’t know when, but it is finally on the way. The outcome will be very damaging for Europe and the world financial system. That is why you do not want to own currencies, except for day-to-day business. The gold cabal deliberately distorted the currency relationship to gold and silver this past year, but all they did was hold the beach ball under the water. It will resurface with a giant pop this year. Market intervention is only temporary, as you all are about to discover.  That means your only alternative is gold and silver coins, shares and bullion. If you do not act now, especially at these low prices, you will be making a mistake. Economic and financial dislocation is at hand. The timing is left to fate. The crisis of debt can only be held at bay for so long and then the markets reassert themselves.

European bankers, politicians and bureaucrats believe the ECB has bought time, substantial time. They may have, but it will be interesting to see whether Greece defaults and leaves the euro over the next three months. A move such as a euro exit could bring major changes in the euro zone.

The problems that have emerged via virtually unlimited money and creation have caused in some quarters a crisis of confidence and instead of buying time a new floor is being erected to form an even more destabilizing crisis, as debt catches up with debt and derivative exposures become part of the complex problems. The problem of expectations brought by a serial Ponzi scheme is not ever going to go away. It leads to hyperinflation and collapse. The risk of failure is always paramount, especially considering the historical perspective, which has almost always ended in failure. The presence of derivates today has complicated matters even further, when most of the sellers are running naked with no collateralization backing their sales.

The European meltdown, along with the UK and US meltdowns are in process. Just be patient they will play themselves out. It could be 2012 or 2017. Who knows, other than those pulling the strings? They also know how much capital flight will leave Europe. As a result the dollar has found undeserved and unexpected strength, which should bode well for a year of 1-1/2% to 2% GDP growth. The problems are not going to go away, but spenders will be oblivious to what is going on. What is a lifesaver for Europe is a booster for the US and UK. This phenomenon should aid at the least horizontal strength to both US and UK stock markets.

The European problem is going to spread from the original six that includes Italy and Spain to Austria and then to France. That $1 trillion swap was the temporary fix, but what do you do for an encore? Use fractional banking of course. The elitists are going for broke on Europe only to be followed by the UK and US. Thus far both countries have been the beneficiaries of Europe’s woes.

It looks like our guess of a June QE 3 announcement should be right on, although we believe it has already begun. The twist is still in action and remains there until 30-year fixed rate mortgages reach 3.5%.

All these markets are in bubbles and will continue to be so until one bursts and all the others follow. Due to unrelated circumstances the US markets have shown the most resilience in this a national election year. Such an ongoing situation could draw a larger amount of funds from Europe and on the USDX an 86-dollar. Neither would be beneficial. 2012 will probably not be the terrible year for the US economy, but from 2013 onward could be. The key presently is confidence in Europe being able to control the economies and finances of its members.


Last week the Dow rose 1.2%; S&P 1.6%; banks rose 5.6%; broker/dealers 4.0%; cyclicals 4%; transports 1%; consumers 0.4%; high tech 2.1% and semis 3%. The Russell 2000 rose 1.2% and Nasdaq rose 3.4%. Gold bullion rose $54.00, the HUI gold index rose 2.4% and the USDX rose 1.3%.

Two-year T-bills rose to 0.25%, the 10-year T-notes rose 8 bps to 1.96% and the 10-year German bund rose 4 bps to 1.85%.

The Freddie Mac 30-year fixed rate mortgage fell 4 bps to 3.91%, the 15’s fell 1 bps to 3.23%, the one-year ARM’s rose 2 bps to 2.80% and the 30-year jumbos fell 13 bps to 5.54%.

Fed credit fell $19.6 billion and is up 20.3% yoy. Fed holdings of Treasuries and Agencies fell $15 billion to $3.405 trillion. Custody holdings for foreign banks were up $61 billion.

M2, narrow, money supply added $1.9 billion to $9.664 trillion.

Money market assets fell $1.9 billion to $2.693 trillion.

Total commercial paper out fell $30.1 billion to $929.


            The Securities and Exchange Commission has modified its controversial policy of letting defendants settle cases without admitting or denying wrongdoing but the change is so narrow and applies under such limited circumstances that one critic denounced it as “less than meaningless.”

            Until now, the SEC has condoned a contradiction. Defendants could plead guilty to criminal charges or be convicted of them and still settle related SEC civil cases by stating that they neither admit nor deny the agency’s charges.


            Former CDR Financial Products Inc. Chief Financial Officer Z. Stewart Wolmark and Vice President Evan Zarefsky are to plead guilty in a fraud case involving municipal bonds in federal court in New York, a person familiar with the matter said.

            The pleas, scheduled for today before U.S. District Judge Victor Marrero come a week before opening arguments were scheduled to be heard in the bid- and auction-rigging in the municipal bond market case. CDR founder David Rubin and his Beverly Hills, California-based firm, pleaded guilty on Dec. 30.


            Less than 20 percent of homeowners who theoretically qualify for a government mortgage modification are actually eligible, according to data released Monday by the Treasury Department.

            Although roughly 4.6 million U.S. homeowners have missed at least two mortgage payments -- making them technically eligible for Making Home Affordable, the federal government's flagship homeowner assistance program -- a whopping 80 percent of those borrowers cannot be helped by the program. According to the Treasury report, just 900,000 homeowners actually qualify for a loan modification under Making Home Affordable.


            Job openings in the U.S. decreased in November for a second month, a sign gains in employment will take time to develop.

            The number of positions waiting to be filled dropped by 63,000 to 3.16 million, the Labor Department said today in Washington. Employers took on workers at a faster pace as hiring climbed by 107,000 from the prior month to 4.15 million.

            Fewer openings may mean the financial crisis in Europe and political gridlock in the U.S. are inhibiting companies from expanding amid concern the world’s largest economy will slow. Payrolls increased by 200,000 workers last month after a 100,000 gain in November, and the unemployment rate fell to 8.5 percent, Labor Department figures showed on Jan. 6.

            Inventories at wholesalers barely rose in November and growth in the prior month was revised lower, suggesting the economy did not get as big of a boost as expected from companies restocking their shelves in recent months.

            Wholesale inventories climbed 0.1 percent, the Commerce Department reported on Tuesday, falling short of analysts' expectations of a 0.5 percent gain.

In the report, the government also lowered its estimate for inventory growth in October to 1.2 percent from 1.6 percent.


            The Obama administration, in conjunction with federal regulators and led by the overseer of Fannie Mae and Freddie Mac, is very close to announcing a pilot program to sell government-owned foreclosures in bulk to investors as rentals, according to administration officials.

            There currently are about a quarter of a million foreclosed properties on the books of Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA), and millions more are coming.

            The foreclosure processing delays of last year created a mammoth backlog of properties yet to be processed, which are just now being re-started. One of the initiatives of this program is for the federal government to be in the position to mitigate and manage any new wave of foreclosures, sources say.

            Late-stage delinquencies still in the pipeline number close to two million, according to a new report from Lender Processing Services. Foreclosure starts outnumber foreclosure sales by two to one and "the trend toward fewer loans becoming delinquent, which dominated 2010 and the first quarter of 2011, appears to have halted," according to LPS.

            Knowing this all too well, the Treasury Department, Federal Reserve, HUD, FDIC, Fannie Mae and Freddie Mac, with their conservator, the Federal Housing Finance Agency (FHFA) at the helm, are engaged in a collaborative effort to face this new wave of foreclosures head on and figure out a way to keep these properties from sitting on the books of the government and sitting empty in the nation's neighborhoods.

As the Federal Reserve alluded to in its white paper on housing last week, "A government-facilitated REO-to-rental program has the potential to help the housing market and improve loss recoveries on reo portfolios." REO's (Real Estate Owned) are bank-owned properties, or, in this case, properties owned by the government-sponsored enterprises and the FHA. Three Fed governors pushed for similar plans in speeches last week, as well.

            A pilot sales program will be starting in the very near future, according to administration officials. They are working on what the market potential is, what pricing would be, how government can partner with private investors, and who has the operational experience to manage so many properties.

            "I think there is a fair amount of money in the wings waiting to buy, investors doing cash raises to buy properties on a large scale," says Laurie Goodman of Amherst Securities. "But that means they have to build out a rental organization; it means they build out a management company, because if you're accumulating a hundred homes in Dallas that's very different than running a multifamily building."