International Forecaster Weekly

The Greatest Outpouring Of Money And Credit In History

12.7 trillion donated to bankers, solving a problem they created, buy bonds, or gamble in the markets? Inflation on the way, could the US default on its debt? Food aid and unemployment rising together, yet another bank collapse, Dubai bailed out.

Bob Chapman | December 16, 2009

The past two years have seen the greatest outpouring of money and credit from central banks and governments in history. In most countries interest rates cannot fall much lower being presently under 1% or close to zero. You might call this an attempt at fiat money recovery. As a result of pump priming for the past six months or more investors have returned to the same gambling and risk taking they engaged in before, the losses of which caused the world economy to come to the edge of the financial abyss. All sectors of investment are again affected by a casino mentality.

We see $12.7 trillion donated without their consent of the lender taxpayers to the top world economies, or about 20% of world GDP. These funds, a good part of which will never be retrieved, have been stuffed into the pockets of bankers, Wall Street, insurance companies and GM and AIG. 80% of the problems we have had to face were caused by these very same entities, which along with the Fed, propose to solve the problem they created. It is as if they are the only ones in the world who know best what is good for our system and for us. They as well continue to play in the giant casino as if nothing ever happened. While this transpires there are still trillions of dollars in bad debt and impaired assets on the books that have to be written off. The solution to that is to not truthfully report companies’ financial conditions. If you can believe this, the Chairman of the Board of the Financial Accounting Standards Board, the FASB that sets American accounting standards has called for the “decoupling” of bank capital rules from normal accounting standards. His proposal would encourage bank regulators to make adjustments as they determine whether banks have adequate capital while still allowing investors to see the current fair value. In order words it is ok to have two sets of books and to mark assets to model, which is marking assets to fantasy. Telling investors the truth is secondary. For almost 20 years banks have had to use GAAP for the basis for capital rules. If banks had their way there would be no rules. The FASB has been compromised and resides in the back pocket of the bankers. There you have it. Bankers are more equal than others. Their balance sheets are worthless. This should not be allowed to happen in America.

At first the G-20 nations wanted to remove monetary stimulus and now they say it is too early to do so. What they do not tell you is if they did remove trillions from their economies they would collapse. Europe, the UK and US have losses of $1.7 trillion they haven’t written off of yet. In addition, they have hundreds of billions in losses for foreclosed loans that are still flowing in, to further befoul their balance sheets. We have to laugh when central bankers talk about draining trillions from the system. If they pull liquidity the system collapses. Other than feeding money and credit into the system the bankers have no solution. Keeping them in charge is like giving a pyromaniac matches. Even if $500 billion more in stimulus is added to the system from TARP funds or from Congress, it is only going to keep growth in place until the end of next year. As a result inflation is going to soar. There is no real recovery. All we have seen is the Fed pouring trillions of dollars into the US and world economy.

There are two basic schools of thought regarding the economy. One is buying bonds for safety and the other with virtually no interest money is gambling in the markets. As a result we have a bull market in bonds and a bear market rally in the stock market. These factors lead investors and the public to the perception that a recovery is underway when nothing could be further from the truth. If it was true someone has to explain to us why consumer spending is off 20% yoy, which makes up 69.3% Of GDP? It is no wonder households are not spending. They have just lost $13 trillion in home equity and the housing bubble still has 20% to go to the downside. Quantitative easing has been a failure. We are still in a prolonged period of credit contraction that has been subdued temporarily by massive does of liquidity. Those hardest hit are small businesses and homeowners. All that retirement money is gone, because the Fed created a housing bubble. In 2009, homes lost 40% of their value and they have 20% to go and who knows how long the housing market will bump along the bottom. Reducing debt and spending is the new mantra. This will certainly reduce demand and economic growth. Blatant market manipulation in the long run will not be successful. 2.8% GDP growth is non-existent. The stock market may be booming on zero interest Fed funds, but as we pointed out last February middle America is in depression. In order to keep this façade going and the bubble in tact, the Fed has no choice but to inflate. They want to withdraw funds, but they cannot. They are recalling TARP funds, which will be quickly gobbled up by a new stimulus program and a call from the Treasury to buy more Treasuries, Agencies and toxic waste. Bernanke has to be running around in circles as members of Congress grill him on poor performance and the House passes HR1207, the Bill to audit and investigate the Fed. In addition bank lending is off 16.2% yoy and there are no signs of any loosening. We are looking at object failure by the Fed, which we reflected almost three years ago. There is no normality and no recovery. You cannot spend your way into recovery. It just doesn’t work. Look at the 1930s. It didn’t work then and it won’t work now. Government guarantees challenge reality and reality always wins. As a result of fed policy we have corporatist fascism at its worst. Day by day we attract less foreign capital and that is because any semblance of free markets are gone. All the Fed has done is rescue its owners and other connected elitists and such a plan is doomed to failure.

We started in the gold markets in 1960. We were the largest gold and silver stockbrokers of that time. We recommended stocks that ran from $0.25 to hundreds of dollars a share. It has been 29 years since June 1980 when we exited the market. Since then these markets have been difficult even though the last ten years have been very rewarding. Had it not been for the powers behind government manipulating the markets, it would have been far more rewarding. This is what happens when an uninterested public allows a criminal enterprise to run their lives. Most people born after 1960 know little about the gold and silver bull markets of the late 1970s. They are only told of the great bull market we have seen since 1983. Those in their 40s and younger are about to get an education in how real life works. Not the life created by Wall Street and the Fed, because that era is about to end and with it the fairy tale life they have been used too. Gold’s current price of over $1,000 an ounce is only the beginning. We spent ten years moving from $252 to $1,224. Now the advance is going to accelerate and could more than double in 2010. It should also be noted that during this past ten year period the dollar has lost 80% of its purchasing power, which shows gold is an excellent inflation hedged, as well as a deflation hedge. For the past 6-1/2 years all currencies have fallen versus gold and that is because they have had the same Keynesian monetary policies as the Fed. As a result gold has maintained its purchasing power.

It had been fashionable for the past ten years to say gold does not pay interest. This is the argument Gordon Brown, now UK PM used in 1999, when he sold the British citizens’ gold at $275.00 and leased a large part of what England had left. That masterstroke cost British citizens close to $10 billion. He did this when he was Secretary of the Treasury. Which would you rather have had, 5% interest or a capital gain of more than 200%? This experience certainly destroys the pays no interest theory. Owning gold and silver related assets is not speculation; it is wealth preservation. The great gold and silver bull markets of the last 1970s should have been seminal events, but they were not. Only 15% of the public participated, the remainder were buried in the stock market. Over the past ten years it has been worse. Only 2% to 3% of investors have been involved. In a way that is good, because it leaves lots more potential buyers to assist in pushing gold and silver higher. This is why we believe gold and silver have a long way to go on the upside.

There is no question that another bout of inflation is on the way and that the dollar will continue to fall in value. We do not believe gold and silver are today reflecting reflation. They are reflecting a flight to quality because professionals and a minority of other investors have lost faith and trust in the top 20 central banks. Thus, today we are witnessing a flight to quality and safety. Gold and silver are the only real way to protect against financial calamity and offer possibilities for profit simultaneously.

If you add in the fact that the US government has been manipulating the gold and silver prices, you can see the power that they will have to the upside. Wall Street has known for years gold and silver prices have been suppressed, but that scheme is about to end. The power of the elitist forces behind government to rig these markets has been faltering over the past six months. They no longer have the bullion for sale and are forced to use futures and derivatives to manipulate prices. That lasts for several days, then it is over, and then prices rise again. If HR1207 and S604 are passed and the Fed is audited then several months from now we will know exactly what the “Working Group on Financial Markets” have been doing. Audit will show how the Fed and the Treasury have rigged these two markets for years. It will also show how all markets have been manipulated and it will be game over. Gold and silver will make up for lost time shooting up to their fair values, and even if Ron Paul’s bill is not passed the influx of investment funds into these metals will eventually overwhelm their markets. Real inflation since 1980 would see gold between $6,700 and $7,150 an ounce. Even official inflation would price gold at $2,400 an ounce. People are going to finally realize that as their purchasing power and investments have fallen in value gold and silver have risen. Two years ago we had real inflation at 14%. We could easily return to that level in 2010. That cuts a regular stock portfolio in half in five years.

In the pipeline is $12.7 trillion created by our government and the Fed to keep our economy and financial system from collapsing. There is absolutely no way it can be withdrawn. The US Inspector General says we are on the hook for potential losses of $23.7 trillion. These kind of problems and the inflation they caused by the Fed adding more fuel to the fire will in and of itself force more investors into the arms of gold and silver. The only things keeping the economy from crashing is government spending and Fed monetization. We have begun the vicious cycle of inflation again along with a falling dollar. If you really want to protect your wealth you had best be in gold and silver related assets. They are the only protection you have.

Revisiting the other side of the equation it should not be forgotten that the Fed has created out of thin air $1.75 trillion to purchase $300 billion in Treasuries and $1.45 trillion in toxic waste and Agency securities. All of that money has been monetized, fed into the system, except that held on deposit by banks at the Fed. Part of these funds and TARP funds were used to run the stock market up some 54% in six months. That has only happened six times in 100 years. It is no secret as to why the stock market rose, but at the same time unemployment rose 22.2%. The Dow is 2,000 points higher than it should be under the circumstances. This is a propaganda setting to give the illusion that all is well.

We believe that the US dollar will be officially devalued in a year to 1-1/2 years from now to be replaced with an international trading unit. That will cause another flight to quality to gold and silver.

One of our contacts in Aussieland has a close contact in Guangzhou, China, who he has known for a number of years. When our contract told his friend that the US could default on its debt and devalue a year or more from now. The friend in China said, a high level Chinese government official who attended a business meeting on December 7th said the following: 2010 inflation will kick in both in China and the US, that would make it very bad for business in China and that the Chinese currency would strengthen to 6 to the US dollar. As you can see America’s problems are going to affect the entire world.

We continue to see the dollar hit lower lows. Yes, we currently are well aware of the dollar rally. Another government sponsored rally calculated to keep the rest of the world’s dollar holders happy and prove the US has a strong dollar policy. If you looked at the long positions of Goldman Sachs, JPMorgan Chase and Citigroup you will find that at the end of the third quarter they were very long the dollar, short gold and silver and the shares. This is another temporary dollar rally and a temporary gold and silver take down. Next the dollar will be allowed to hit lower lows, ostensibly to increase the US trade advantage, which is laughable. It could add ½% to GDP at 71.18 and 1% at 65 on the USDX, which is not a solution for the American economy. Always left out of the reporting is that a lower dollar means higher prices for commodities and goods imported into the US and considerably more inflation. It will not encourage more foreign investment, because investors do not know how low the dollar will fall and it will not appreciably increase job opportunities. Jobs are still moving offshore to bolster 3rd world economies and to make giant untaxed profits for transnational conglomerates. Free trade, globalization, offshoring and outsourcing were created to destroy the economies of the US, Europe and Canada and that is exactly what has happened and will continue to happen, because our purchased Congress won’t legislate the solution, which is tariffs on goods and services. We are well on our way to joining the third world and if you do not let Congress know you know what they are up too, then you will eventually live in a slum reminiscent of Calcutta, either that or in some US detention camp. The bottom line is a lower dollar is disastrous for the US economy. The US is being slowly strangled to death. Who wants to invest in a country that is on the edge of real trouble, plus all the environmental laws and onerous taxes? Readers, most people do not have a clue as to how bad it is.

Last week the Dow added 0.8%; the S&P was unchanged, the Russell 2000 fell 0.4% and the Nasdaq 100 was unchanged. Cyclicals rose 0.5%; transports fell 0.2%; consumers fell 0.3% and utilities rose 4%. Banks fell 1.5%; broker/dealers fell 2.5% and high-tech fell 0.6%. Semis were unchanged; Internets fell 0.3% and biotechs rose 0.1%. Gold bullion ended the week off $47.00 and the HUI fell 5.8%. The dollar rose 0.8% to 76.53.

Two-year T-bills fell 2 bps to 0.73%, the 10’s rose 8 bps to 3.55% and the 10-year German bund fell 3 bps to 3.21%.

Freddie Mac’s 30-year fixed rate mortgage jumped 10 bps to 4.81%; the 15’s rose 5 bps to 4.32% and one-year ARMs fell 1 bps to 4.24%. the 30-year jumbos fell 17 bps to 5.82%.

Fed credit declined $19.3 billion to $2.168 trillion. That is down $78.7 billion ytd, and $73.7 billion yoy. Fed foreign holdings of treasury debt gained $12.1 billion to a record $2.944 trillion. Custody holdings for foreign central banks expanded at an 18% rate ytd, up $450 billion yoy.

M2, narrow money supply leaped $22.6 billion to a record $8.414 trillion, up 29% ytd and 4.5% yoy.

Total money market assets added $1.1 billion to $3.320 trillion. They have declined $520 billion ytd, or 14.1% annualized. They fell $457 billion, or 12.1% yoy.

A record 37.2 million people, or about one out of every eight Americans, received food stamps in September, as the recession drove a surging jobless rate, according to a government report.

Recipients of the subsidy for retail-food purchases climbed 18 percent from a year earlier, according to a statement posted today on the U.S. Department of Agriculture’s Web site. Participation has set records for 10 straight months.

The government boosted food aid as unemployment soared, heading to a 26-year high of 10.2 percent in October. The jobless rate cooled to 10 percent last month, the Labor Department said on Dec. 4.

“We’ve been working to get that money out the door” to families that need assistance, Deputy Agriculture Secretary Kathleen Merrigan said last week in an interview.

Nevada had the biggest increase in food-stamp participation rates from a year earlier, surging 54 percent, followed by a 46.5 percent jump in Utah, according to the USDA. Texas had the most recipients at 3.1 million, followed by California with 2.9 million and New York with 2.6 million.

Recipients increased in every state and the District of Columbia, except Louisiana. Because of a sharp rise after Hurricanes Ike and Gustav in 2008, the number of people in Louisiana getting food stamps fell 65 percent in September from a year earlier. Gains of more than 30 percent from 2008 were reported in 18 states.

About 35 million people are expected to receive food stamps each month through the Supplemental Nutrition Assistance Program in the fiscal year that began Oct. 1, according to the budget that President Barack Obama sent to Congress in May.

“In this economic time, SNAP has been essential,” Merrigan said. The participation rate of state residents who are eligible for food stamps varies widely, the USDA said last month in a report based on 2007 data.

In Missouri, about 100 percent who were eligible that year took advantage of the program, the highest rate in the nation, followed by residents of Maine and Michigan, at 91 percent and 89 percent, respectively, the USDA said. Wyoming’s participation rate of 47 percent was the lowest in fiscal 2007, followed by California and Idaho at 48 percent and 50 percent, according to the study.

Nationwide, participation in the food-stamp program was 66 percent of those eligible for the aid in 2007, the USDA said. The department has budgeted for a rate of 68 percent in the current 2010 fiscal year.

“We know of a lot of people who are SNAP-eligible who are not participating in the program,” Merrigan said. “We are working with states to improve participation.”

Colonial BancGroup Inc.’s collapse in mid-August could cost the Federal Deposit Insurance Corp. more than double the amount it originally projected.

Colonial, which was deemed the sixth largest bank failure in U.S. history after its seizure four months ago, had a current net worth of negative $5.8 billion by the end of the third quarter. That’s far worse than its original estimate of $2.8 billion to its insurance fund, according to recent data released by the FDIC.

“It basically says Colonial was a lot worse off than everybody thought it to be,” said Bert Ely of Alexandria, Va.-based bank consulting firm Ely & Co.

Also, the FDIC possesses more than $4.2 billion of the Montgomery-based bank’s assets currently in liquidation. However, the FDIC also expects to loss more than $3.1 billion on those assets, according to a balance sheet posted by the FDIC.

Citigroup Inc. reached an accord with the Treasury Department and regulators to repay $20 billion of the bailout it received from U.S. taxpayers.

The lender will sell $20.5 billion of capital and debt, the New York-based bank said in a statement today. The bank will sell $17 billion of common stock, with an over-allotment option of $2.55 billion, and $3.5 billion of tangible equity units. The U.S. Treasury will concurrently sell as much as $5 billion of common stock it holds. The bank said it will also substitute “substantial common stock” for cash compensation.

Chief Executive Officer Vikram Pandit has pressed for an exit from the Troubled Asset Relief Program to avoid being the only large bank left on “exceptional assistance,” a Treasury designation reserved for companies including American International Group Inc. and General Motors Corp. that are surviving on taxpayer aid. Bank of America Corp. exited last week after paying back $45 billion of bailout funds.

The cost of protecting investors against Dubai defaulting on its debt tumbled the most since February after Abu Dhabi pledged $10 billion to help the emirate meet its obligations.

Five-year credit-default swaps on Dubai’s debt fell 115 basis points to 425.5, according to CMA DataVision prices at 11:40 a.m. in London. The Markit iTraxx SovX Western Europe index of swaps on 15 governments dropped 4.75 basis points to 62, according to JPMorgan Chase & Co.

Funds from Abu Dhabi, the capital of the United Arab Emirates and owner of the world’s biggest sovereign wealth fund, will help Dubai World unit Nakheel PJSC pay investors the $4.1 billion it owes on Islamic bonds maturing today. State-owned Dubai World roiled markets worldwide when it said Dec. 1 it was in talks with creditors to restructure $26 billion of debt.