International Forecaster Weekly

The Impact of Bubbles And The Future of Risk

Bubbles of years ago being felt today, why rescue people from their mistakes? Destructive economic processes at work, many countries on the verge of bankruptcy, America now holds debt far beyond its ability to pay back, Debasement the order of the day, Bill Gross of PIMCO looks to developing nations for stability...

Bob Chapman | March 20, 2010

There was no turning back after June 2003. The last bubble was in the process of being created. The collapse of real estate, both residential and commercial, had been put in place and their fateful journey had begun. The credit expansion had begun and there would be no stopping it until it had run its course. Currently the credit crisis is in its initial 30th month with a possible end in sight. If quantitative easing is withdrawn, money and credit is dramatically reduced and interest rates are increased, deflation will start to make headway. In today’s circumstances we have a sovereign debt crisis, which is worsening. You put all this together, and in the absence, further stimulation of one form or another, the world could easily fall into a deflationary depression.

Everyone wants to be rescued from their mistakes and that simply can’t happen. In the meantime to finance this illusion they both go deeper and deeper into debt.

Europe is far more advanced into their destructive process. The euro zone is headed toward dissolution and perhaps the European Union as well. We will have the answer on the euro zone within two years. The beginning of the end has begun with Greece’s problems and the reluctance of Germany to bail that country out. Due to this reticence Germany has been threatened by other members of the euro zone and the EU, which was more than dumb. What they do not understand is what they have put into motion can’t be stopped. The euro and the euro zone was a political creation doomed to failure from its very beginning. The masters of Europe, the “Black Nobility” are watching their euro zone being destroyed, as well as its mission to usher in a one-world currency and government. Germany doesn’t want to cooperate, so they are being referred to as fascists again. Reality is snapping at their heels and they do not like it.

Political control of Europe held by the Bilderbergs is slipping from their grasp and they are not happy about it. In Germany and in other European countries the people are speaking out against the control of their countries by Illuminist agents or the speculators who have run their countries into debt and into the ground as they have in America as well. You have to remember as well that there are 19 countries close to or already in a state of bankruptcy and there is little hope of reversal in any of them. The collapse of these countries is inevitable; it is only a question of when. The havoc being blamed on speculators has foundation, but the profligate governments put in power by the elitists are what really laid the groundwork for failure and that we believe was done deliberately.

Socialism in Europe is nothing new. It began with paternalism in the 19th century and it has held the people in bondage ever since.

The re-imposition of what has been known historically as British mercantilism, presently known as free trade, globalization, offshoring and outsourcing has laid waste the production of goods and services in the US and to a lesser degree in Europe. Politicians and corporate opportunists have been very willing to expedite the demise of American and European manufacturing, all but totally destroying their economies. Yes, the emerging world will escape the brunt of the economic onslaught, but only by degree. No on can escape what is coming. Keep in mind 60-1/2% of all countries’ foreign exchange reserves are in dollars and at least 20% have to be in euros. As both currencies fall in value versus other currencies, purchasing power is lost by the holders. In addition these conditions are part of the cause of all currencies falling against gold. In the end even non-participants suffer from the debt, dislocation and socialism. The theory of decoupling does not work. The third and second worlds are not going to prosper as the US and Europe collapse and to think so is very short sighted.

Financially and economically the previous two administrations were a disaster and the current one in many ways is even worse. We still have two very expensive occupations and one current war, the cost of which is conveniently off budget.

Corruption reigns in the House and the Senate and budget deficits are the largest in history. There is little incentive or even available funds to invest, as higher taxes will be proposed after the next election in November. The spending is endless and you will pay higher taxes to pay for it. The hole that this Congress and administration is digging will finally destroy America financially - bills that are no longer payable - debt far beyond America’s ability to pay it back. The welfare state is upon you.

Sovereign debt will become overwhelming over the next two years. A new class of junk bonds will overwhelm debt markets, as the big hitters, China and Japan, stop buying and slowly move into commodities and gold and silver to protect themselves. Banking and Wall Street have deliberately taken down the financial system and further enriched themselves in the process leaving the American taxpayer with unpayable debt.

In addition, we are saddled with $1.35 quadrillion in derivatives of which trillions are in naked credit default swaps.

Debasement is the order of the day. Markets do strange and unusual things as our government blatantly manipulates all markets 24/7 via “The President’s Working Group on Financial Markets.” Some markets such as gold and silver are deliberately suppressed and the world’s stock markets defy gravity staying up perpetually with no logical means of support. You won’t hear this on CNBC or mainstream media, but it is the reality of what is really going on in the financial world.

As stimulus assistance moves to its peak in March retail sales continue to slightly improve, although results are still in negative territory in spite of more than $800 billion being injected into the economy. The best description that can be applied is a stabilizing sideways trend. Unfortunately as stimulus exhausts itself, sales and the general economy will be hard put to continue even slight improvement. When those with money to spend were polled those with income twice the average have cut buying by 13% from January to February and 19% y-o-y. Those with the means have to spend, if they do not there can be no recovery. As you can see that is not happening. Dropping home values and layoffs at the top of the ladder have decimated the prime mortgage market and with it spendable income. A 19% drop in spending is a normal reaction to these unfortunate events and we can expect more of the same unless the Fed stops removing liquidity and more stimuli are added. The problem is we cannot do this indefinitely, because the debt markets are unwilling to fund such foolish expenditures. Why do you think your government wants your retirement plans; Social Security, Medicare and Medicaid are already broke. People have contributed and worked a lifetime only to be screwed by their government, which has become a den of thieves. Unemployment is 22-1/8% and it is headed higher. We predicted 2-1/2 years ago, when personal consumption was 72% of GDP, that consumption would revert to the long term mean of 64.5%, and so it will. If the elitists follow what we think is their current plan, we see even lower figures over the next several years. A shift is taking place that will influence spending for years to come. We are about to revisit the economic mindset of the 1950s and 60s. The rich and well-to-do will continue to cut back and the social climbing affluent will all but disappear. You can’t eat pretensions.

In regard to unemployment it is deceitful for government to trumpet U-3 at 9-7/8%, when their own U-6 shows unemployment to be officially 16-7/8%, including the birth/death ratio, which is totally bogus. That means the real unemployment rate is 22-1/8%.

Most observers have zeroed in on the budget deficit of $1.6 trillion. Equally as important is servicing old debt as well as new debt. Refinancing for the Treasury is a problem. The two biggest holders of US debt continue to buy less or none, just rolling current commitments. In February, Japan was a net seller of $300 million and China sold $5.8 billion worth. The big question is will the Fed have to continue to buy 80% of issuance as they did this past year? That certainly will continue to stoke inflation. Over the next five years $1.2 trillion of old debt has to be refinanced, which includes $526 billion in 2012.

The stampede of homeowners from underwater and foreclosed residential real estate is gaining momentum.

A group of 14 senators have accused China of currency manipulation. This could start a trade war and force the US to implement tariffs on goods and services.

Even if all this gets refinanced everyone else will get crowded out and interest rates will have to rise, especially if America’s triple A rating is lowered. That shuts out medium and small companies and individuals, which will get little or nothing. How will commercial mortgages get refinanced, some $60 billion in just two years. These are huge numbers. It is no wonder the government wants to exchange guaranteed annuities for your pension plans. As you can see the next few years will be very difficult.

For the week of March 17th, the commercial paper market fell $22.4 billion to $1.122 trillion.

The President’s Working Group on Financial Markets is trying to block financial reforms being proposed by Sheila Bair’s FDIC. This is what Brooksley Born went through 12 years ago.

Tariffs on goods and services are in the way. 130 Congressmen are co-sponsors of a bill to take action against China and its currency policies. There are hundreds of nations that have been doing the same thing for years. This currency manipulation bill has been a long time in coming. Not only China, but also most of the rest of the world has taken unfair advantage of America by creating an unlevel playing field. This has been exacerbated by free trade, globalization, offshoring and outsourcing. China has to come to terms with the deal they made and that was to take on depreciating dollars for major market penetration. The US received inexpensive goods and low inflation in return. There is nothing resilient about China’s economy, especially if tariffs are erected. The downside for the US is most goods and services in the US would be more expensive than they would be otherwise, but unemployment wouldn’t be over 22%, it might be 8%. This is the way we operated for 200 years and we became the strongest nation in the world.

We should not be afraid to upset China and others; we have ourselves to think about, not some country that is essentially a slave labor camp run by a totalitarian government. It is an unnatural situation for America to import 35% of their clothing from one nation.

America and many other nations will devalue over the next few years and that should solve the dollar and debt problem, not only for the US, but for many other nations as well. Those events will allow those nations to rebuild to bring more balance to the world economy. Yes, interest rates will rise and we will be back in the 1950s and 1960s again but that is fine; Americans can handle the challenge. This all can be more easily accomplished by getting rid of the Federal Reserve and its monopoly on monetary policy, by turning their mission back to our Treasury where some transparency can exist.

The more Treasuries that other nations don’t buy the quicker America moves toward devaluation and default, which will take the whole world down with it financially. A nation cannot long survive financially when America continues to produce massive deficits. Soon 50% of US tax revenues will be needed to service debt. A nation cannot survive with such a burden. This is why we are convenienced tariffs; devaluation and default are on the way not only for the US but for most other countries as well. There is no other way out.

Rep. Bachus demands hearing on Lehman report, says Fed, SEC may have 'turned a blind eye' on fraud "Either the SEC and the New York Federal Reserve failed to discover the ongoing accounting fraud at Lehman, or they turned a blind eye to the ongoing fraud," Bachus said in a letter to the committee's chairman, Barney Frank…

The Federal Reserve Board must disclose documents identifying financial firms that might have collapsed without the largest U.S. government bailout ever, a federal appeals court said.

The U.S. Court of Appeals in Manhattan ruled today that the Fed must release records of the unprecedented $2 trillion U.S. loan program launched primarily after the 2008 collapse of Lehman Brothers Holdings Inc. The ruling upholds a decision of a lower-court judge, who in August ordered that the information be released.

The Fed had argued that disclosure of the documents threatens to stigmatize borrowers and cause them “severe and irreparable competitive injury,” discouraging banks in distress from seeking help. A three-judge panel of the appeals court rejected that argument in a unanimous decision.

The U.S. Freedom of Information Act, or FOIA, “sets forth no basis for the exemption the Board asks us to read into it,” U.S. Circuit Chief Judge Dennis Jacobs wrote in the opinion. “If the Board believes such an exemption would better serve the national interest, it should ask Congress to amend the statute.”

The opinion may not be the final word in the bid for the documents, which was launched by Bloomberg LP, the parent of Bloomberg News, with a November 2008 lawsuit. The Fed may seek a rehearing or appeal to the full appeals court and eventually petition the U.S. Supreme Court.

Wholesale prices in the U.S. fell in February more than anticipated, led by a drop in fuel costs and signaling there are few inflation pressures building in the early stages of the economic recovery.

The 0.6 percent decrease in prices paid to factories, farmers and other producers was the biggest since July and followed a 1.4 percent January increase, according to figures from the Labor Department in Washington. Excluding food and fuel, so-called core prices climbed 0.1 percent.

Deutsche Bank AG, JPMorgan Chase & Co., UBS AG and Hypo Real Estate Holding AG’s Depfa Bank Plc unit were charged with fraud linked to the sale of derivatives to the City of Milan.

Judge Simone Luerti scheduled the trial of the four firms, 11 bankers and two former city officials for May 6, Prosecutor Alfredo Robledo said after a hearing in Milan today. The banks allegedly misled the city on swaps that adjusted interest payments on 1.7 billion euros ($2.3 billion) of borrowings.

Prosecutors across Italy are probing banks as local and national government agencies face potential losses of 2.5 billion euros on derivatives, lawyers say. The Milan probe may also affect cases as far away as the U.S., where securities firms have faced charges for price-fixing and bid-rigging in the sale of derivatives to municipalities, though not for fraud, according to former regulator Christopher “Kit” Taylor.

“This case could have repercussions over here if the trial showed deliberate intent,” said Taylor, a former executive director of the Municipal Securities Rulemaking Board, the national regulator of the municipal-bond market. “What happened in Europe was the continuation of a pattern in the U.S.”

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., increased holdings of bonds from non-U.S. developed nations for a fourth month, taking them to the highest level since May 2004.

Gross raised the proportion of the securities in the Total Return Fund to 19 percent of assets in February from 18 percent in January, according to a report placed on the company’s Web site. He increased U.S. government debt to 35 percent from 31 percent, the first increase since October 2009, and lowered net cash to 2 percent from 9 percent.

Gross, 65, co-chief investment officer at Pimco in Newport Beach, California, advised investors in a commentary published in January to seek investments in “less levered” countries such as China, India and Brazil whose economies are not as prone to “bubbling.” He called the U.K. “a must to avoid,” while recommending Germany and Canada.

German and Greek bonds have rallied this week as Standard & Poor’s said it’s no longer planning an imminent downgrade of Greece. S&P affirmed Greece’s BBB+ rating, removing it from “creditwatch negative.” The U.S. and U.K. have moved “substantially” closer to losing their AAA credit ratings, Moody’s Investors Service said on March 15.

The Federal Reserve’s decision to let its mortgage-debt purchase programs end this month risks driving up home-loan rates and worsening the housing crisis, Nobel laureate Joseph Stiglitz said.

“The withdrawal of the support risks increasing the interest rate, increasing the number of foreclosures and exacerbating the strain, the stress, that American families are already facing,” Stiglitz said in an interview in Tokyo. He said officials “misjudged things,” and predicted foreclosures and bank failures this year will exceed the 2009 and 2008 totals.

Stiglitz said the main dangers for the global economy are that central banks will “exit too rapidly” from measures adopted during the crisis, propelled in part by an “irrational” fear among some investors that inflation will soar. The liquidity created by central banks battling the recession isn’t likely to fuel consumer prices because of subdued consumer demand, he said.

The warning by the Columbia University economics professor and former chairman of the White House Council of Economic Advisers is a contrast with the steps being taken by the Fed and its counterparts to rein in monetary stimulus to prevent a buildup of new imbalances that could destabilize the economy. In Asia, central banks are moving toward raising interest rates to prevent asset-price bubbles.

The U.S. and the U.K. have moved “substantially” closer to losing their AAA credit ratings as the cost of servicing their debt rose, according to Moody’s Investors Service.

The governments of the two economies must balance bringing down their debt burdens without damaging growth by removing fiscal stimulus too quickly, Pierre Cailleteau, managing director of sovereign risk at Moody’s in London, said in a telephone interview.

March 12 MBA Mortgage Applications decline 1.9%, March 14 ABC/Wash. Post Cons. Confidence rise to -43 vs -49.

The US leading index grew 0.1% in line with forecasts in February compared to January's more robust 0.3% increase.

The Leading Indicators released by the Conference Board measures future trends of the overall economic activity including employment, average manufacturing workweek, initial claims, permits for new housing construction, stock prices and yield curve. It is considered as a measure for economic stability in United States. This event generates some volatility for the USD

The economy will keep expanding without a pickup in inflation that would require the Federal Reserve to raise interest rates, reports today indicated.

Consumer prices were unchanged in February, the first time they didn’t increase since March 2009, Labor Department figures showed today in Washington. The index of leading indicators rose 0.1 percent last month, the 11th straight gain, according to the Conference Board, a New York research group.

Other reports showed manufacturing accelerated this month and fewer Americans filed for jobless benefits, signalling the rebound from worst recession since the 1930s is poised to generate jobs. FedEx Corp. is among companies benefitting from a global expansion as businesses rebuild depleted stockpiles and exports climb.

The Philadelphia Federal Reserve Bank said its business activity index rose to 18.9 in March from 17.6 in February.

Economists had expected a reading of 18.0, based on the results of a Reuters poll, which ranged from 14.0 to 23.0.

Any reading above zero indicates expansion in the region's manufacturing.

The survey, which covers factories in eastern Pennsylvania, southern New Jersey and Delaware, is seen as one of the first monthly indicators of the health of U.S. manufacturing

Fewer Americans filed first-time claims for jobless benefits last week for the third consecutive time, a sign the labor market is gradually improving along with the economy.

First-time jobless applications dropped by 5,000 to 457,000 in the week ended March 13, in line with forecasts, Labor Department figures showed today in Washington. The number of people receiving unemployment insurance increased, and those getting extended benefits also rose.

Companies are cutting fewer jobs as sales rise and the economy recovers from the deepest recession since the 1930s. A sustained increase in payrolls is needed for consumer spending, which accounts for about 70 percent of the economy, to accelerate.